PDC Energy (PDCE)

[dan_s]

Note from Raymond James 8/8/2018:

As we discussed in our energy daily (Link) yesterday, Initiative #97 appears to have likely received enough signatures (~171,000 vs. ~98,500 requirement) to receive a spot on the November ballot. Recall, Initiative #97 - proposed by the Boulder-based group Colorado Rising - aims to create 2,500-ft. buffer zone setbacks between new oil and gas operations and occupied structures and ''vulnerable areas.'' The initiative would cripple the energy industry in Colorado if implemented. We've been down this road before when a similar setback initiative was proposed back in 2016. At that time, the COGCC (Colorado Oil & Gas Conservation Commission) issued a study (Link) that found ~90% of the state of Colorado would be off limits for oil & gas development.

While we acknowledge the likely overhang that will exist on DJ Basin stocks over the next three months until the election in November, we think the sell-off the past few days (avg. DJ Basin stock down ~10%) creates an excellent investment opportunity. The probability of a positive outcome for the industry is definitely skewed favorably. The DJ pure plays XOG and SRCI have been hit the hardest the past few days (each down ~14-15%), while other DJ operators including Noble, Anadarko, HighPoint Resources, and PDC Energy have also suffered. Currently, SRCI screens as one of our favorite SMID-cap stocks with top 3 debt adjusted growth profile (~35%) and one of the cheapest valuations in our universe (4.4x 2019 EV/EBITDAX).

MY TAKE: The oil & gas industry is extremely important to the economy of Colorado. The state is full of "Environmental Wacko" who think we should all ride bikes to work. BUT... The taxes generated by the upstream companies are a MAJOR source of the states revenues. Initiative #97 will not pass because politicians always go for the money. Plus, it has been proven over and over that oil & gas operations are safe and fracking is not a threat to drinking water.