Anadarko’s Fight Goes Beyond Election Day in Colorado

(Bloomberg Opinion) -- If you can't wait for next Tuesday's voting to be over, spare a thought for Anadarko Petroleum Corp. 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 (see this for more detail on Proposition 112). 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.

While the oil and gas lobby sees hopeful signs in recent polling, 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.

It's been roughly a year since Anadarko hit the reset button on its strategy, embracing the returns-over-growth mantra that is now 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 so far 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 that Proposition 112 gets voted down, as well as the fact that Anadarko's activity there wouldn't go to zero on November 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 November 6. If the measure gets 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 already 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, now 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. 

To contact the editor responsible for this story: Mark Gongloff at mgongloff1@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Liam Denning is a Bloomberg Opinion columnist covering energy, mining and commodities. He previously was editor of the Wall Street Journal's Heard on the Street column and wrote for the Financial Times' Lex column. He was also an investment banker.

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