Energy Stocks Gain After Voters Reject Colorado Measure to Curb Drilling

(Bloomberg) -- Energy investors can breathe after Colorado's measure to curb drilling in the state, otherwise known as Proposition 112, was defeated with 57.5 percent voting to reject and 42.5 percent voting to approve.

Wall Street looks for stocks to claw back up after significant underperformance, though likely Democratic control in the state could add some regulatory challenges going forward. Colorado-exposed energy stocks are rallying in pre-market trading, with producers including SRC Energy Inc. up about 20 percent, while midstream company Western Gas Partners LP is up 6 percent after an upgrade from Bank of America Merrill Lynch.

RBC, Brad Heffern and Scott Hanold

Referred to Proposition 112 as the industry's "death penalty," and expects "strong double-digit positive reactions from the pure plays (SRCI, XOG) and solid high single-digit reactions from the diversified names with exposure (APC, NBL)."

"However, likely Democrat control of the Governorship and Colorado House/Senate indicates a more difficult regulatory environment going forward, and we also think investors did not expect 112 to pass."

Williams Capital, Gabriele Sorbara

Expects investors to buy XOG along with its peers, and notes the "Niobrara group trades at the cheapest valuations in the sector with an average 2019 and 2020 EV/EBITDA multiple of 3.5x and 2.8x, respectively."

"We would expect the Niobrara names to rally on average ~25% in a short period, expanding the average Niobrara multiple by roughly half a turn. This would place the group at a roughly one turn discount to the E&P sector (which has recently re-rated lower), as the Niobrara names will likely continue to have regulatory discount associated with them."

Baird, Joe Allman and Ethan Bellamy

Expects "meaningful upside for the Colorado-exposed names, especially the E&Ps."

Sees SRCI and NBLX likely being the top outperformers.

Notes that "Amendment 74, initially supported wholeheartedly by the oil and gas industry but later supported less enthusiastically, if at all, failed 46.5% Yes to 53.5% No, with 76% of the votes counted. This proposed constitutional amendment needed 55% to pass."

Goldman Sachs, John Nelson, Jerren Holder, Brian Singer

Defeat to be "most positive" for XOG, PDCE, DCP, SEMG, WES

Sees "potential upside for XOG/PDCE/NBL to $12/$55/$29, or upside of 39%/18%/7% vs current levels"

Bank of America Merrill Lynch, Dennis Coleman

Viewed "DCP, NBLX, NGL and WES as having the most exposure to the issue and expect these names to react positively this morning."

Expects MLPs with Colorado exposure to provide color regarding confidence of operating in the state, along with capex guidance. "That said, we also expect these names to continue efforts to diversify geographically."

"The issues brought forward by Prop 112 proponents could be a recurring overhang in Colorado, and a similar ballot measure may manifest in the next general election in 2020."

Upgrades WES to buy from neutral.

Raymond James, John Freeman

Upgrades NBL to outperform from market perform as the overhang is now removed, and the firm is also positive on the company's free cash flow outlook.

"The favorable resolution removes a huge overhang that has persisted for months on DJ Basin-exposed operators."

To contact the reporter on this story: Michael Bellusci in Toronto at mbellusci2@bloomberg.net

To contact the editors responsible for this story: Courtney Dentch at cdentch1@bloomberg.net, Steven Fromm, Will Daley

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