Anadarko’s drilling fight goes beyond Election Day

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.