Cramer’s Favorite Natural Gas Stock
The word decoupling, at first, might bring to mind the economic ties between the US and China, as well as the debate over whether such a thing will ever happen. But Cramer is focused on two other market forces and the unusual split between them: oil and natural gas.
The price of crude historically has stayed about six times that of natural gas. Right now, though, with nat gas hitting a low on Wednesday of just $3.60 per thousand cubic feet, oil fetches 16 times that figure. Put simply, this commodity is too cheap, Cramer said, even though “we’re in a period of profound oversupply for natural gas in this country.”
What’s interesting is that the low price hasn’t hurt the sector’s stocks, at least not lately. Cramer attributes this to a growing belief that natural gas has hit its bottom, and now investors are piling in for the ride back up.
Linn Energy Chairman and CEO Michael Linn, during Wednesday’s Mad Money, presented his own case for nat gas. He told Cramer that President Obama will need to rely on it until solar and wind energies are viable and ubiquitous, as natural gas is 50% cleaner than oil. Also, Linn sees a wave of consolidation hitting the sector, offering investors the chance for some calculated speculation as to who the targets will be.
So what’s the stock to buy? Cramer likes Anadarko Petroleum, especially after the price pullback in both oil and natural gas on Wednesday, which pushed down the sector’s share prices as well. Anadarko’s fundamentals have been strong, thanks to a number of diversified offshore leases and great reserve replacement, and a recent secondary offering has cleaned up the balance sheet.
On May 12, Anadarko raised $1.5 billion selling 30 million shares at $45.50 a share. Now Anadarko is sitting on about $2.2 billion total in cash, has access to another $1.3 billion credit facility and holds a net debt ratio of around 30%. There were concerns that the company might come up short between $600 million and $800 million in needed capital, but the new cash has taken care of that problem.
As for the fundamentals, Anadarko’s business is 65% natural gas and 35% liquids, with only a fraction of 2009 and 2010’s production already hedged – 28% and 13%, respectively. That leaves plenty of room for the company to take advantage of an upswing in price. There are also Anadarko’s 10 large discoveries in the past 12 months, something Cramer called “phenomenal,” and finding costs are down 8%.
Those offshore leases are a big plus, too. Anadarko has a presence in the Gulf of Mexico, Brazil, West Africa, China and Mozambique, giving the company great geographical diversification. Twelve more deepwater drills are planned with a potential 100 million barrels of oil equivalent. And while production growth is expected to be just 1% to 3% because of the recession, reserve replacement should be strong. Anadarko has clocked its replacement rate over the last three years at over 200% annually. That will be key for growth going forward.
A look to the charts offers another reason to buy APC. While the stock sold for $45.50 at its secondary opening, it only reached as high as $45.91 before “regretful buyers,” as Cramer called them, started unloading their positions. As a result, APC dropped to a low of $41 and change by Friday, May 15. But that selling looks to be done now, and the stock should work on any dip, such as the one we saw Thursday.
Natural gas is too cheap, making this stock a winner, Cramer said. Anadarko Petroleum is “the best of the bunch.”
Cramer made natural gas and Anadarko Petroleum sound like a great investment. But what about the threat of imported liquefied natural gas? Watch the video for more on that.
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