Energy

Liam Denning is a Bloomberg Gadfly columnist covering energy, mining and commodities. He previously was the editor of the Wall Street Journal's "Heard on the Street" column. Before that, he wrote for the Financial Times' Lex column. He has also worked as an investment banker and consultant.

Anadarko Petroleum Corp. just offered Halliburton Co. some validation, so that's nice.

Oilfield services giant Halliburton spooked the sector on Monday by saying exploration and production firms were "tapping the brakes" on drilling. On Tuesday, Anadarko did just that. Reporting second-quarter results that missed expectations across the board, the company cut its guidance for full-year production and capital expenditure.

Anadarko slipped on many fronts. An explosion in Colorado in April led to the company shutting down several thousand wells and an ongoing investigation. Meanwhile, expenses on dry holes drilled in Cote d'Ivoire savaged earnings. Once a high-flier relative to its peers, Anadarko's stock has fallen back toward the bottom of the pack:

Dark Days
Anadarko's stock has fallen by 35 percent this year after a string of setbacks
Source: Bloomberg
Note: Performance indexed to 100.

It's easy to overstate the significance of Anadarko's guidance cut. The capex budget (excluding that relating to Anadarko's stake in Western Gas Partners LP, a pipeline company) will be about $300 million, or 6.5 percent, lower than the guidance given in May. The vast majority of this reduction, however, relates to spending on international exploration and deepwater drilling.

Similarly, the 4 percent cut to U.S. oil-production guidance relates mostly to divestitures and the Colorado explosion.

What investors ought to be looking at, particularly as they fret about those comments from Halliburton, is what Anadarko is saying about the outlook for its core shale positions in Colorado's Denver-Julesburg ("DJ") basin and the Delaware area of the Permian basin.

These are the engines driving Anadarko's medium-term growth plans, and the company isn't throttling back. Capital spending on them was $461 million in the second quarter, up 20 percent on the first quarter and way higher than the $255 million the company spent on its entire onshore business in the Lower 48 states a year earlier.

Meanwhile, Anadarko maintained guidance for crude oil production from the two basins to end 2017 at about 150,000 barrels a day -- more than a third higher than the average for the second quarter:

Great Expectations
As Permian production heats up, Anadarko is guiding towards a big increase in oil output from its two core shale positions by the end of the year
Source: The company

Having reported two dismal sets of results in a row, it is imperative that Anadarko deliver on this production target. It has a large stockpile of drilled but uncompleted wells on which to draw. And having sold a slew of assets in January, it has given itself some room on the balance sheet to fund development; net debt has fallen to 2.5 times Ebitda from 3.6 times at the start of the year.

Now valued at just over 6 times 2018 Ebitda, Anadarko looks relatively cheap, even compared to the other "mini-majors." These have been under a cloud anyway, as they don't offer the relative comfort of the supermajors and also don't offer the pure exposure to shale of U.S.-focused E&P companies (no West African dry holes for them).

Tapping the brakes won't solve that issue. Still, Anadarko hasn't switched off the engine altogether.

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

To contact the author of this story:
Liam Denning in New York at ldenning1@bloomberg.net

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