Anadarko’s drilling fight goes be­yond Elec­tion Day

Houston Chronicle Sunday - - BUSINESS - By Liam Den­ning

If you can’t wait for Tues­day’s vot­ing to be over, spare a thought for Anadarko Pe­tro­leum.. Be­sides choos­ing politi­cians, Coloradans will vote that day on a pro­posal that could se­verely cur­tail drilling in a state where oil pro­duc­tion has more than quadru­pled since 2010. It also hap­pens to be where Anadarko has in­vested more than $10 bil­lion over the past five years and gen­er­ates al­most 60 per­cent of its on­shore U.S. oil and gas pro­duc­tion.

The oil and gas lobby sees hope­ful signs in re­cent polling, but the past cou­ple of years should tem­per any­one’s cer­tain­ties about call­ing the out­come of a ref­er­en­dum. And Colorado isn’t the only head­wind fac­ing Anadarko and its peers.

Anadarko has in­vested more than $10 bil­lion over the past five years in drilling in Colorado.

It’s been roughly a year since Anadarko hit the re­set but­ton on its strat­egy, em­brac­ing the re­turns-over­growth mantra that is de rigueur for any E&P com­pany that wants to avoid a shel­lack­ing in the stock mar­ket. De­liv­er­ing third-quar­ter re­sults Wednes­day morn­ing, CEO Al Walker stuck with that mes­sage, in par­tic­u­lar reaf­firm­ing the com­pany’s $50 oil-price plan­ning as­sump­tion (oil has av­er­aged $67 this year). The com­pany kept the capex bud­get un­changed, bought back $500 mil­lion of shares in the quar­ter and em­pha­sized more pay­outs and pay­ing off debt as pri­or­i­ties for 2019. Plus, Anadarko re­ported its first quar­ter of pos­i­tive free cash flow in al­most two years:

All good stuff. Yet since hit­ting a peak for 2018 in July, the stock is down al­most 24 per­cent (even af­ter Wednes­day morn­ing’s bump), lag­ging the sec­tor, the oil price and, es­pe­cially, the mar­ket.

In part, that re­flects nerves about Colorado. These are jus­ti­fied up to a point, though should be tem­pered by the pos­si­bil­ity Propo­si­tion 112 gets voted down, as well as that Anadarko’s ac­tiv­ity there wouldn’t go to zero Nov. 7. It can also pivot in­vest­ment to­ward other as­sets, such as its Per­mian po­si­tion.

More per­ni­cious is that an­tipa­thy to­ward the sec­tor ex­tends far be­yond its po­lit­i­cal op­po­nents in one state.

Un­cer­tainty over Colorado, while un­help­ful, isn’t the big­gest fac­tor weigh­ing on Anadarko’s stock. In­vestors should bear that in mind as they head to­ward Nov. 6. If the mea­sure is voted down, Anadarko’s stock will likely get a bump. But if that’s your pri­mary fo­cus, then it would be a more ma­te­rial event for other E&P stocks more lev­ered to the state, such as Bo­nanza Creek En­ergy Inc. or PDC En­ergy Inc. If the mea­sure passes, then Anadarko would likely get dinged, but it is pric­ing in some of the im­pact.

More im­por­tant is fix­ing that wider ail­ment drag­ging the whole sec­tor down, namely a lack of trust. Even as oil prices have re­cov­ered in the past cou­ple of years, in­vestors are re­luc­tant to price them fully into E&P val­u­a­tions for fear of the pro­ceeds be­ing squan­dered blindly on growth. Anadarko’s strat­egy, a year old, aims at re­but­ting such per­cep­tions and per­suad­ing in­vestors to dial back the risk premium and dial up the mul­ti­ple. Look­ing be­yond what­ever hap­pens next week, Anadarko should keep do­ing what it is do­ing.

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