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Why Big Colorado Oil & Gas Producers Anadarko and Noble Energy Dropped 11% in May

By John Bromels - Jun 6, 2017 at 10:35AM

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A home explosion had consequences for these two oil industry players. Is it a buying opportunity?

What happened

May was a rough month for oil industry players Anadarko Petroleum (APC) and Noble Energy (NBL). These top oil and gas producers in Colorado saw their stocks' performance suffer as three factors affected their outlook: an Anadarko gas well blamed for a home explosion in Colorado, fallout from their Q1 earnings, and tumbling oil prices.

Anadarko's stock dropped 10.8% throughout the month, and Noble's fell 11.2%. That was in a month when the overall oil and gas production and exploration market -- as measured by the SPDR S&P Oil & Gas Production and Exploration ETF -- fell only 6.7% and the S&P 500 overall rose by 1%.

Pipelines in trench.

An uncapped underground gas pipe attached to an Anadarko well was responsible for a home explosion in Colorado. Image source: Getty Images.

So what

On April 27, a home in Firestone, Colorado -- a suburb north of Denver -- exploded, killing two men who were replacing a hot water heater. What at first appeared to be a tragic household accident was soon linked to an Anadarko-owned gas well that was less than 1,000 feet from the property. Sure enough, investigators eventually discovered that an abandoned return flowline connected to the well hadn't been properly capped. Gas from a cut in the pipeline seeped into the home, causing the blast.

As a result, Anadarko and Noble -- Colorado's two largest gas producers -- were ordered to inspect all of their wells located within 1,000 feet of buildings. Both were also the targets of a lawsuit filed from a different Firestone homeowner in mid-May. 

It's tough to tell exactly what effect the fallout from the explosion may have had on the companies' stocks, because both companies reported earnings in early May (Noble on the 2nd and Anadarko on the 3rd), right around the time that the well was emerging as the cause of the explosion. 

Then what

The companies' earnings weren't what analysts -- or investors -- were hoping to see. Anadarko reported Q1 earnings of negative $0.60/share, much worse than the analysts' consensus of negative $0.26/share. Noble fared somewhat better, with earnings of negative $0.05/share, compared to analysts' consensus of negative $0.13/share.

Although both companies reported negative earnings, there were some bright spots. Noble reported record Q1 sales volumes from its operations in Israel, where it spent 75% of its capital expenditures. It also made a bolt-on acquisition of Clayton Williams Energy, adding to its position in the red-hot Southern Delaware Basin in Texas. 

Anadarko reported some record sales volumes of its own, in its deepwater Gulf of Mexico operations and its Delaware Basin holdings. It also improved its margins by achieving a liquids product mix of 61%, up from Q1 2016's 53%. But even with these improvements, the company still wasn't able to turn a profit. 

Between those negative earnings reports and the Colorado news, both stocks' shares tumbled in the early days of the month, and then slid further along with the overall oil industry in the later part of the month, as oil prices dropped, ending a three-week rally:

APC Chart

APC data by YCharts

Now what

The Colorado situation sounds pretty bad, but it's unclear what -- if anything -- is going to be required of Anadarko or Noble, and whether any such requirements or court judgments will have an impact on the companies' bottom lines. That said, there's no particular upside to either company's current situation.

Primarily, we're looking at two companies whose fortunes will rise and fall with the overall oil market, and in May, both the market and the fortunes fell. Because Anadarko and Noble are both independent exploration and production companies without major midstream or downstream operations to add ballast to their businesses, investors should expect a rocky road for both stocks for the foreseeable future.

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