re BCEI: here's a more nuanced view from an institutional research report:
Colorado Prop 97 Gets On The Ballot for November:
Yesterday, Colorado state verified enough signatures to put Proposition 97 on the ballot for a November 6th vote by the
citizens of the state to determine if they want to continue to drill for oil and gas.
While Prop 97 is pitched as “no drilling near homes and schools” (probably a good idea), there is a clause saying no drilling
near sensitive areas, including intermittent streams. Given the thaw and spring rains, most of Colorado land is near a stream, thus if this Proposition passes, it effectively eliminates oil and gas drilling in the State of Colorado.
“Pure play” E&P’s, such as SRCI, HPR, BCEI, XOG and PRHR
would be significantly impacted, potentially reducing their ability to operate. Companies with other drilling locations would be hurt, including NBL, PDCE and APC.
Thoughts on the Stocks:
We feel most investors expected the measure to gain a spot on the ballot. Most investors also expected the DJ Basin names to take another hit on this news. Given such expectations, we might expect only a modest selloff. In the medium term, we might see the stocks rally into the vote, assuming the consensus of “doesn't pass" proves out.
But we do admit, this vote is hard to game and the outcome binary. Our best guess is the initiative does not pass, but that is most certainly a “consensus view” and perhaps already somewhat “in the stocks”.
What Might Happen?
Given that this is a binary event (it passes or it does not) and recent polling and voting have been diverging,
some investors are reluctant to own the names ahead of Nov 6th.
The biggest reason is an at best “balanced” risk/reward,
meaning that you could loose 50-70% of your capital if the measure passes, but get only a 15-50% move higher if it doesn’t.
One way to play this vote with higher reward vs risk is to use December call options. We see some options offering 100-300% upside and your risk is limited and known.
Surprise Compromise?
One outcome less talked about would be if the measure passes would be to own the stocks. As this is a legislative initiative, we could see a compromise favorable for E&P’s, given energy’s importance to the economy and budget. For example, one could imagine a law written needing a 10 year, privately funded “study” of the “sensitive areas” before drilling permits would be revoked. Thus the energy industry could continue to drill while waiting for a lengthy, expensive study. This would make “buying when there is blood in the streets” the right move, as stocks would work their way higher as the legislative compromise plays out.
"The best way to get what you want is to deserve what you want." --Charlie Munger
