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(Bloomberg Gadfly) – Five bucks: The price of a fancy cup of coffee had a subtle, but important, role on Anadarko Petroleum Corp.’s earnings call on Wednesday morning.
Anadarko is at the vanguard of U.S. exploration and production companies proclaiming a shift in emphasis from growth to value. It unfurled that particular banner with a surprise $2.5 billion buyback program, announced six weeks ago. It reinforced the message on Wednesday.
Growth, said CEO Al Walker, is an output of Anadarko’s capital-planning process, not an input. And the board intends to meet later this month — earlier than usual — to discuss next year’s budget and likely changes to an executive compensation plan that, like so many others in the industry, has been criticized for encouraging expansion over efficiency.
As an antidote to creeping activism in the E&P sector, it’s powerful stuff. Despite missing forecasts on several fronts in the third quarter, Anadarko’s stock was up on Wednesday morning (though weaker oil prices later took the wind out of its sails):
The mantra of value does raise an interesting question about a target Anadarko put out only eight months ago, though.
At its investor day in March, the company aimed to double its oil production by 2021, compared with 2016; or, in other words, growing it by an average compound annual rate of 15 percent. Underpinning this was a planning assumption of oil at $55 a barrel.
Change Since Anadarko’s March Assumption About Future Oil Prices: $5
At the time, Walker said Anadarko was “very comfortable” with that growth rate and suggested it might go up a little bit if market conditions allowed. The slide is still featured in the company’s standard investor book on its website (slide 15, in case you’re interested).
Here’s an idea of what that might mean for Anadarko’s oil production using such an assumption:
Things have changed since the spring, though.
Anadarko has had to trim its production target for 2017, largely because of Hurricane Harvey. Even so, at the midpoint, it still implies 20 percent growth this year.
More important was the decidedly more ambiguous language around that 15 percent growth rate on Wednesday’s call. Asked about it several times, Walker said this in his first response:
I don’t think at this juncture talking about the compound and annual growth is as important as making sure that we give you the type of returns in a $50 [oil price] world that this budget we believe if ratified will provide. So, growth at this point is really going to be, as I said earlier, an output not an input.
Besides punting a definitive answer until after the next board meeting, that $50 figure is key. It is $5 lower than the earlier price level that underpins the 15 percent growth plan; and, indeed, one analyst made a point of clarifying this on the call.
Right now, oil is actually around $55 to $60 a barrel, using West Texas Intermediate and Brent prices. Yet when CFO Robert Gwin addressed the implications of higher oil prices, he said investors shouldn’t assume that extra cash flow — roughly $100 million a year per buck-a-barrel — would go into higher spending.
The implication, even if Anadarko didn’t say it outright, is that its ambitious medium-term growth target is due an adjustment — not merely in its level but in how it is presented relative to the company’s next update on plans for spending and returns.
The other implication is that Anadarko isn’t necessarily buying the recent rally in oil prices as portending further big gains. In Walker’s words:
I think today what we’re trying to do is position the company to do well in a world that’s 45 to 60 [dollars per barrel]. We don’t anticipate a sustained environment above 60.
This mirrors a wider reduction in oil price expectations since March:
Walker’s price comments are, of course, an additional important signal of changed priorities. But he also said that the industry’s better application of technology to drilling and completion would continue to put downward pressure on breakeven prices.
It’s worth noting that later in the morning, rival Newfield Exploration Co. was also banging the drum for focusing on returns and living within its means at $50 oil. “We hear you … The land grab is behind us,” as CEO Lee Boothby put it. Importantly, Newfield emphasized this despite having actually turned in much stronger results and raising its production guidance for the year.
The shift in attitudes certainly looks real, and some of the more blue-sky predictions of long-term growth from shale producers may have to be reined in (Pioneer Natural Resources Co., which reports after the close on Wednesday, is one to watch in this regard).
Yet it would be presumptive to extrapolate from this that shale production is about to hit a wall, especially as OPEC’s efforts to raise prices are — as they did around this time last year — providing further opportunities for U.S. E&P companies to lock in hedges. A more consolidated, tech-savvy shale industry with a sounder investment proposition could, in some ways, be an even more formidable obstacle to much higher oil prices over the medium term.
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.
To contact the author of this story: Liam Denning in New York at firstname.lastname@example.org To contact the editor responsible for this story: Mark Gongloff at email@example.com.