Colorado is open for business

[dan_s]

This is from Stifel:

Cloud Lifts Over CO
While a well-telegraphed signature shortfall for anti-oil & gas development initiatives was broadly anticipated,
an improved political climate in Colorado should draw long-term investor attention to the strong returns and
attractive valuations of Wattenberg Field operators.

Signatures Fall Short...
Yesterday, Colorado's Secretary of State announced that signatures for initiatives #75 and #78 aimed at restricting oil and
gas development in the state fell short of the 98,492 minimum with only ~81% and ~78% of the required number for
inclusion on the November ballot. While proponents of the two measures have 30 days to appeal the decision, the release
effectively terminates the two initiatives.
Initiative #75 proposed granting regulation of oil and gas development to local communities including authorization to
prohibit, limit, or impose moratoriums on development. Currently the state regulates oil and gas activities. Initiative #78
proposed increasing the mandatory setback from new oil and gas development facilities to 2,500’ from areas of special
concern vs the current rule of 500' from an occupied structure. The broad definition of sensitive areas would have placed
90+% of the land in the state’s top five oil and gas producing counties off limits to further oil and gas development
according to studies done by the Colorado Oil and Gas Commission and the University of Colorado.

...As Expected
Prior to PDCE's 2Q16 conference call on 8/9/16, when management expressed its confidence that the signature count
would fall short of the requirement, stocks with significant DJ Basin exposure under-performed our peer group this year
(-1% vs our peer average +42%) largely due to Colorado’s political risk. After PDCE's call, these stocks
performed in-line with our group (+6.1% vs +6.3%). Yesterday's stock performance (DJ group +2.4% vs our group
average +0.7%) suggests the positive news was largely priced in before the official announcement.

Overhang Gone, Discount Remains
Many short-term investors that we spoke with over the past three weeks bought DJ exposure recently in anticipation of a
signature shortfall and were positioned to sell on the news. Numerous long-term investors that we spoke with over the
past year, on the other hand, have been unwilling to bear the Colorado political risk that accompanied DJ Basin exposure
despite the strong returns, solid balance sheets, and discounted valuations of the companies developing the Niobrara.
Elimination of these proposals, coupled with the industry's "Raise the Bar" initiative (which would raise the requirements to
amend the state's constitution), should redirect investor focus from Colorado's perceived anti-oil climate to the high quality
of assets located in the core of Wattenberg Field. We reiterate our Buy ratings on NBL ($35.63), PDCE ($69.44), and
SYRG ($6.80). All three have strong balance sheets while their DJ Basin wellhead returns rank among the best in the
industry . Despite their recent performance and comparable field-level returns, these stocks are valued at a
significant discount to Permian Basin peers.