I view Anadarko Petroleum as relatively more risky than its peers. Firstly, Anadarko Petroleum Corporation (NYSE:APC) engages in a significant proportion of multi-year long-term projects which require huge capital outlays and have higher development risk. Secondly, Anadarko is engaged in exploration projects in certain African regions, which are relatively under explored and carry a higher chance of failure. This risk is partially mitigated by Anadarko Petroleum’s high deep-water exploration success rate of 67%.
Last but not least, legal and regulatory risks represent a bigger threat in certain emerging countries that Anadarko Petroleum Corporation (NYSE:APC) operates in. Ownership and tax-related disputes are among the common problems experienced with natural resource projects in such countries.
Cabot Oil & Gas Corporation (NYSE:COG) has key drilling operations in the Eagle Ford Shale in Texas, Marmaton oil play in Oklahoma, and Marcellus Shale in Pennsylvania. Cabot Oil & Gas Corporation (NYSE:COG) is exposed to a range of high return drilling opportunities, having identified about 3,000 locations in the Marcellus Shale, widely regarded as one of the most economic and large-scale resource plays in the U.S.
However, everything has a flip side. Legal & regulatory risk is a wildcard for any business and Pennsylvania is one of the hotspots for new oil & gas drilling regulations. In February 2012, Pennsylvania’s Oil and Gas Act was amended to introduce new restrictions on hydraulic fracturing, including an impact fee for drilling.
Conclusion
When investors come across natural resource companies or property developers/REITs, they tend to make their investment decisions by comparing the value of the hard assets with their share prices. I adopt a different approach, as I profess not to be an expert in valuing such assets. Instead, I look for companies with differentiated strategies focused on minimizing risks and maximizing returns.
For example, I prefer REITs which target acquisition in less crowded markets with weaker competing bidders. Along the same line of thought, Panhandle Oil and Gas Inc. (NYSE:PHX) is my preferred pick in oil & gas, because of its strategic focus on operational flexibility and low cost.
The article This Is Not Your Average Oil & Gas Company originally appeared on Fool.com and is written by Mark Lin.
Mark Lin has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Mark is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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