Proposition 112 Poses An Existential Threat To The Colorado Oil Industry

With just a week to go to until election day in the United States, the oil industry is on edge about a new initiative on the Colorado ballot this voting cycle. The imminent Proposition 112 vote is the most important political event for the O&G industry in recent memory.

At stake is the future of thousands of potential drilling locations in the prolific Rocky Mountain oil and gas resource plays.

By changing a well distance requirement known in the industry as a setback, the Proposition 112 resolution could preclude oil and gas development on upwards of 54% of the total land surface area of Colorado according to analysis conducted commissioned by the Colorado Oil & Gas Conservation Commission (COGCC). The percentage of acreage impacted is even higher in the most sought after drilling areas.

Thus, Proposition 112 could unhinge O&G activity in the great state of Colorado for years to come, essentially sterilizing a vast amount of geologically promising rock. A yes vote might be followed by additional legal and political wrangling (drawing out the impact) and pre-existing permits are likely to be grandfathered in (which could delay a direct hit into the early-2020s). However, if this rule is made effective in its current form, the measure would eventually result in a dramatic slowdown in energy extraction efforts across the state.

There are currently 32 drilling rigs actively drilling in the state, a number that could decline dramatically over the next several years if Proposition 112 is implemented.

Understandably, well permit filings from oil producers have surged in advance of the vote. This week, news reports indicated that Noble Energy has received approval on a plan to drill up to 772 wells across 64,000 acres of Colorado farmland. However, even with this plan approved by the COGCC, it is still unclear if permits would be subject to Proposition 112 restrictions if the public votes “yes” on November 6, 2018.

AlphaSense helps monitor company risk from new political resolutions like Proposition 112 in three key ways:

  • Identify companies with exposure by searching a universe of companies by the name of the resolution
  • Gauge the sense of urgency by looking for an inflection in the number of references to the resolution
  • Understand management’s perception of the risk and planning for it

After identifying exposure with a search for Proposition 112 in a universe of energy companies, the following stock price performance index was constructed to demonstrate how Wall Street is discounting the risk.

This exercise reveals that Wall Street has started penalizing the stocks of companies with exposure to the DJ Basin (which is the prolific oil play where activity would be most impacted if the resolution were to pass). Colorado oil producers have been underperforming the broader E&P peer group as the vote approaches, particularly in August when it became clear that there were enough signatures for the rule change to make the November ballot. If indeed, the Proposition 112 initiative explains the discount, then a “no” vote might cause reversion to the mean.

A quick search for this rule, Proposition 112, also reveals an inflection in O&G industry attention beginning in September and carrying into October 2018. Drilling down into the search results shows that the oil industry is putting forth a confident front that the measure will be defeated. As one drilling CEO put it: “we, like most, are hoping that common sense will prevail and defeat the proposition.”

Both the oil industry and prominent locals (including John Elway) have initiated an anti-Proposition 112 media blitz, blanketing TV stations in Colorado with opposition ads. Despite this pro-industry campaign, recent polling still shows the measure passing by a narrow margin.

Even if Proposition 112 doesn’t pass on November 6, it will likely resurface again on future Colorado ballots in some shape or form. This proposal could be a lasting issue that the industry faces each election cycle. Meanwhile, all eyes in the oil industry will be on the results on November 6.

 

Joseph Triepke is Founder and Principal Research Analyst at InfillThinking.com, an oilfield market information firm. Previously, he was a publishing sellside analyst and a buyside analyst working on oilfield service names for firms including Citadel, Guggenheim, and Jefferies. He majored in finance at the University of Texas at Austin.