Investing in frontier markets can add risk and reward to your portfolio. Frontier plays include countries where local politics, social unrest, or substandard financial reporting creates uncertainty or hazards. These countries may hold undiscovered energy or energy considered too expensive to recover. If you can stomach possible upheaval, your reward potential exceeds those of fainter hearts. Here are three energy companies in frontier countries to consider.
Gas in the Pacific
InterOil Corporation (USA) (NYSE:IOC) operates solely in the Pacific country of Papua New Guinea. The primary focus is developing an estimated 10 trillion cubic feet (tcf) of natural gas and bringing it to market. Given the geography, Papua New Guinea will almost certainly export most of its gas to Asia. Exxon Mobil Corporation (NYSE:XOM) has been building the infrastructure for these exports and the two companies are negotiating a deal where InterOil will sell its gas to ExxonMobil.
For the sake of completeness, InterOil Corporation (USA) (NYSE:IOC) also operates retail gas stores in Papua New Guinea, but its natural gas for export business is clearly where the money is going to be made.
InterOil Corporation (USA) (NYSE:IOC) has internal drama of its own. In April, the CEO retired amid controversy regarding a personal friend who had been indicted by the SEC for fraud. A new CEO with impressive credentials has been named. So far, no drama with him.
While the CEO sounds upbeat about InterOil Corporation (USA) (NYSE:IOC)’s prospects, he also commented that in five years he hopes to hear about new discoveries and the first LNG project in the area. Five years? For a company losing money? No wonder the stock once dropped 10% in one day.
A safer way to play the frontier game
If you seek the profit potential of frontier investments but like to sleep at night, try investing in companies with a mix of frontier and established energy plays.
For example, Anadarko Petroleum Corporation (NYSE:APC) recently announced its second major natural-gas find off the coast of Mozambique. In a recent presentation, Anadarko characterized these gas plays as “massive” with a minimum of 35 tcf.
Anadarko Petroleum Corporation (NYSE:APC) set out an ambitious schedule for bringing both natural gas production and export facilities online so as not to be outdone by gas exports from Tanzania, Canada and Australia. The company believes its liquefied natural gas facility in Mozambique could be one of the world’s largest.
As an investment, Anadarko Petroleum Corporation (NYSE:APC) continues to produce profits with increased oil and gas production. The future holds further promise as Anadarko develops not only its Mozambique natural gas plays, but its oil and gas plays off Ghana, Kenya and in the Gulf of Mexico. One frontier play in Algeria began producing oil this past spring and should grow production in the coming years. These operations add to the company’s stable and productive portfolio of US onshore assets. Anadarko also recently doubled its dividend, but at a 0.8% yield, you buy this stock for capital gains.
