Anadarko discovers oil in Mozambique

• Oil prices today
• Recent oil discovery off the coast of Africa
• The company that will help discover more oil

There's a lot of buzz in the oil markets these days, and while we've been kind of lulled into complacency with oil in the $75-$80/barrel range, this situation won't last forever.

It might not even last for long, and right now there's a unique opportunity to buy a highly specialized mid-cap oil company. I'll get to this company in a bit...

In the meantime, the United States currently has one of the largest stockpiles of oil it's ever had, with over 1.13 billion barrels of petroleum inventory - or about 60 days worth of supply at current rates of consumption.

The news immediately caused oil futures to dip - briefly below $75 a barrel.

That'sabout the average price for 2010, year to date:

In bigger oil news, Anadarko Petroleum Corp. (NYSE: APC) discovered oil off the coast of the eastern African nation of Mozambique. According to a story on Bloomberg.com it doesn't appear as though this oil deposit will be viable for recovery and development, but it does prove that there's oil off the eastern coast of Africa - which is pretty significant.

I'm not necessarily interested in Anadarko at current valuations. By a price to earnings ratio, it's one of the most expensive large cap oil companies, it doesn't pay much of a dividend, and it carries a significantly higher debt load than its competitors. Of the companies in the sector, I still like Exxon (NYSE: XOM) - you can click here to read a recent article I wrote about Exxon.

So while Anadarko is part of the story, it's the discovery itself that's really interesting. That's because it's the first discovery of any oil in the area, and it could signify much more exploration and development in the future.

Specifically, it's a deepwater discovery, and there are so few deepwater oil drillers that you can buy the whole industry pretty easily.

The largest deepwater driller is Transocean Ltd. (NYSE: RIG) - a company you've certainly heard about in the news. It was Transocean's drilling rig that exploded and caused the oil spill in the Gulf. The stock got shellacked - perhaps unfairly. They rented the rig to BP (NYSE: BP) - so it seems like they're catching some blame even though they had very little to do with the actual disaster.

If I rent a car and drive it into a crowd of people, Hertz (NYSE: HTZ) shouldn't catch any blame unless there's something fundamentally wrong with the car. I haven't heard any news that Transocean's rig was faulty; it seemed more like BP's operators were to blame.

In any event, Transocean's stock - along with its two biggest competitors, Noble Corp. (NYSE: NE) and Pride International (NYSE: PDE), are all selling near their 52 week lows. Of the three, Noble Corp appears to be the cheapest on a valuation basis, and has the least amount of debt. These companies have traded in unison since the spill in the gulf:

But Noble Corp is starting to lead the way. Considering the bearish news about oil prices and supply coupled with this east Africa deepwater discovery, I'd look at any weakness in the stock to start building a position in Noble Corp.

New oil discoveries in East Africa can only be accessed by the specialized rigs of deepwater drillers and explorers like Noble. You might think that with deepwater moratoriums in the Gulf revenues for deepwater drillers would fall. But according to one industry analyst, L. Farrell Crane of Orleans Capital Management, "the reality is that the deepwater Gulf of Mexico represents a small fraction of their overall business, perhaps 3 or 4% of total revenues."

A 3-4% ding on revenues shouldn't cause a stock to fall close to 50% - but that's what has happened with Noble and its competitors.

I think we can expect around 30% upside over the next few months for Noble - as always, you should buy on weakness and average into this stock over time.

Good investing,

Kevin McElroy

Editor

Resource Prospector

Disclosure: no positions