“It’s a shame that we have to go to such lengths to defend our rights to produce a product that is beneficial to every individual’s life” – Lynn Peterson, CEO, SRC Energy

As most companies active in Colorado will report before the election, investors are attempting to assess the potential effects of the measure when talking to executives during conference calls. While not every company is willing to go into detail on their plans, all have discussed 112 in one way or another.

Companies commonly expressed a sense of pride that the Colorado oil and gas industry, and the business community in general, have come together to oppose the measure through concerted action.

HighPoint Resources: we could work around it although it’s not optimal

HighPoint’s Scot Woodall commented in his prepared remarks “As everyone is well aware, the people of Colorado will conclude voting on Proposition 112 next Tuesday. We are proud members of the oil and gas community and have a strong record of health and safety and providing a strong and positive impact to the Colorado economy.”

“The business community has banded together to defeat this proposal. The industry has funded an educational campaign regarding Proposition 112 and it is clear that when Colorado voters are shown the draconian impact that this proposal will have on the development of the state’s oil and gas resources along with the associated jobs impact, economy impact and state and local tax revenues, support for Proposition 112 will drop significantly. I am confident that this misguided proposal, which is bad for Colorado, will be defeated.”

Q: Could you walk us through how you would be impacted by 112 and what share of your acreage would be available?

HPR: I think on the second quarter call I said that if we did the plan of development that we had originally outlined for Hereford that about 70% of our drilling and spacing units would be impacted. We really come into the impact based on the sensitive areas language, not the occupied structured language of Proposition 112.

There is probably a scenario where we can move a significant number of our pads and be able to access most of our acreage, but it’s not optimal I guess what I would say. So you’re moving locations from section lines to middle of sections, you’re drilling 2.5-mile linked laterals one way and 1.5-mile linked laterals another way, causes increased cost, causes increased gathering cost, causes increased surface disturbance and so a number of things that are not optimum, but we thought that it was important based on our assessment preliminarily that there’s a solution that we could work around although it is not our optimum way of development in our solution.

I still think that Proposition 112 is not good for Colorado, is not good for any of the operators in the state and we continue to think that our positive messaging that we’ve done on Proposition 112 is making progress with the Colorado voters and I still expect for it to be defeated come next week.

Q: Can you talk a bit more in detail on your development under 112?

HPR: If you think about our optimum development plan would be to place pads along a section line and you drilled 2 miles north and you drilled 2 miles south, you lay a spine of infrastructure across those section lines, minimum surface damage, minimal gathering cost.

Well, as you end up because you have some sort of sensitive area and you move a pad 0.5 mile or 1.5 mile up into the middle of a section, then yes, you’re drilling to cover that same 4 miles as you might be going 2.5 miles to the north and 1.5 miles to the south like in my example.

And so one what your landowner agreed to placing a pad in the middle of the section we’re obviously going to have to renegotiate with landowners, you got to re-permit, you’ve got to re-stake. If you follow that scenario, it could be where you’re zigzagging infrastructure kind of all over the place.

Yes, there’s some where you switch the orientation from North-South to East-West. So it was an attempt of our technical team to see what you can do. Obviously, this is in very preliminary phases of development, but just thought that was some exercise that we need to go through and clearly our General Counsel thought it was a disclosure that we need to put in the risk section of the Q.

So come back to my earlier comment, I still feel like that we’re not going to have to go down that path and that Proposition 112 will be defeated and that still the direction that we plan on going.

I think the company has always a message that the way that we put together our acreage position was very specific in trying to target high oil cut areas, which the legacy position being 60%. The new area being 80%, which delivers those margins that we talk about, which delivers those favorable capital efficiency and D&C economics and it also brings a rule component, which we expect to be in our favor as we navigate through be an operator in Colorado.

Q: Given the legwork that you guys have done on this, are there opportunities to bolt on acreage at a decent price or is M&A market still somewhat seized up on account Proposition 112?

HPR: I think there’s always opportunities, but yeah I think all eyes are probably on politics. So the mega announcements this past week of some of our peers in the M&A market, I don’t think you’ll see much in Colorado between now and Tuesday.

Q: And sticking with the Proposition 112, the polling seems to be looking pretty decent going into it. If you’ll just indulge me and we assume a no on Proposition 112 scenario. Can you talk to the industry plans to make sure this doesn’t repeat in 2020? It seems like people are pretty focused in on it?

HPR: Yeah, I would agree with that and I would say that I think my industry peers and myself are pretty committed to trying to do something that prohibits this from becoming a reoccurring event and whether that is continuing our messaging that we’ve done over the last several months about the value that our industry provides to Colorado on how safely and environmentally friendly we are to Colorado.

So I think that is a consistent message that we are going to want to continue because I think it has made a lot of progress about the reception of the oil and gas industry the last several months.

I would also probably say that we want to work out a solution with our communities to make sure that this doesn’t happen again in a couple of years. So I think myself along with my peers, all plan to work with the incoming Governor and the incoming legislative groups to make sure that we find a solution that kind of works for all the stakeholders.

Q: I seem to recall that you guys have a meaningful inventory of permits in hand in the event the Prop 112 initially passes. Could you update us on the numbers as it stands today?

HPR: We clearly have I think more than 100 permits in hand. We have others that have been submitted. I’m not sure exactly how the interpretation of if Proposition 112 passed, is it the November 6 date that is the final date of getting additional permit if it’s when the Attorney General certifies the election.

I think there’s a little bit of a gray area there, but I think that internally the company feels like that we can navigate and execute and implement our 2019 program as planned.

Liberty Resources: all our assets are on wheels

Liberty did not directly address the measure in the prepared remarks section of the call, but analysts did discuss it during Q&A.

Q: I’m wondering if we can get your take on the Proposition 112 initiative and just sort of your thoughts where things are heading, what your response would be if things go the wrong way for the industry. Just generally your take on where that stands.

LBRT: Well, I’ll start right off with saying that we are not in favor of Proposition 112 and together, the industry in Colorado, which is a pretty tight knit community, has come together in many, many ways to educate the State of Colorado, the leaders in Colorado and the folks on what this issue is, what it means, what we do as an industry, I think everyone, the positive that will come out of all this is we’ve spent a ton of effort reaching out and communicating with the broader community something we haven’t done enough in the past.

We had a rally two weeks ago with the Mayors across Colorado and believe it or not, the Mayors of the 10 biggest cities in Colorado, all 10 have come out against Proposition 112 and either spoke at the rally or sent a written statement passionately on why they oppose this measure. So, we’ve put great efforts in educating the population of Colorado through multiple avenues and by all the indications or data we have, those efforts have been effective and they continue to be effective. So, we feel pretty good about where we stand right now, but, I think, the votes are counted in six days.

Q: That’s fair. And I guess how should we think about – if things were to go the wrong way, I mean is there a backlog of work that you guys are going to have, regardless you have some time? Like what would be the impact on your operations just broadly?

LBRT: Yeah. In the short term, nothing, but yeah, there was actually a rather large permit backlog in Colorado. I’ve seen it estimated anywhere from 1.5 to 5 years. So, yeah, the DJ Basin doesn’t turn on a dime. If it did pass, for sure, it’s a negative, for sure, there’s a scramble and there’s a change. Of course, it will be challenged in the courts. You can’t just take everyone’s property, be a democratic vote, there’ll be a battle about that, but activity levels will not change right after Election Day. But if it went the wrong way, if things went poorly, yeah, there will be a declining activity, but probably pretty gradually. And for Liberty, I mean we will fight till the end, but for Liberty, all our assets are on wheels and I think we would have plenty of time to orderly deploy it elsewhere.

SRC Energy: to speculate is a waste of everybody’s time

SRC’s Lynn Peterson expressed clear frustration in his prepared remarks saying “I want to express my appreciation to our entire staff for their incredible passion and efforts over the past several months as they have fought to keep our industry alive and viable in Colorado. While it’s a shame that we have to go to such lengths to defend our rights to produce a product that is beneficial to every individual’s life, this industry and its people have come together like never before, and it makes me proud to be a part of such a wonderful group of professionals.”

“Clearly, the last quarter has seen an incredible amount of volatility as we continued to educate the public on the benefits that our industry brings to Colorado and to our nation through inexpensive energy costs that are developed in a safe and efficient manner. We have a lot of faith that Colorado voters understand that jobs, national security and energy costs are important to everyone and will vote accordingly.”

“Once the election results are known, we need to immediately move forward and continue to develop a cohesive relationship with the executive and legislative branches, as well as the communities where we operate.”

Q: Can you talk to any – knock on wood -assuming no 112, can you talk to any thoughts on strategy from November 7 going on to make sure it doesn’t come back in 2020?

SRCI: We’re down to hours now before the election. I think we’ve obviously spent a lot of time working through a lot of different ideas and thoughts. And we’re quite encouraged where we’re at. We’re confident. We believe that Colorado voters will back us and we can move forward. So, I think to speculate is probably kind of a waste of everybody’s time right now. I think we just need to get the election through next Tuesday and then we’ll move forward.

Q: I’m just wondering if you’ve seen any slowdowns in the rest of the industry based on everybody waiting for this? And could this – if the bill is defeated, would this put any hiccup further on down the road just in terms of anything infrastructure wise or service crews wise for the rest of the industry that might affect the company?

SRCI: I think everybody is moving ahead in normal operations. I don’t anticipate anything like that. I think we are all pretty confident where we’re at and what we’re doing. And I think, as long as we continue to operate in a safe manner, I think we will be fine.

Noble Energy: I’m confident the measure will be defeated

Noble’s David Stover briefly mentioned 112 in his prepared remarks, saying “I want to take a moment to discuss next week’s vote in Colorado. As a part of the Colorado community for many years, we have taken a leadership role in opposing Proposition 112. I’m proud of the engagement of our employees in helping the community understand the substantial negative impacts Prop 112 would have on Colorado’s economy. While the results of the vote will not be known until next week, I remain confident that the measure will be defeated.”

“We continue to receive questions regarding future impacts under different scenarios in the state. Rest assured, we have completed thorough contingency planning and have plans in place for all potential outcomes.”

Q: Can you give us some idea of what your drilling – well, obviously, you’re a bit more rural than your peers. The permitting appears to have stepped up pretty dramatically across the industry. So in the event Prop 112 did get voted through, what would your running room look like as it relates to your current drilling backlog?

NBL: Yeah, Doug, I think what we’ve been clear is, we don’t want to get into those numbers right now, for obvious reasons.

I think if that’s the way it played out, we’d quickly highlight to you where we are on that. But I think right now, we’re keeping everybody focused on the activity to continue to educate the public, which is working extremely well. I mean, I think when you look at probably a month or two ago, probably very small percentage of the public even knew what this Prop 112 was. When you go out now and look at it, probably over the vast majority, probably three-quarters of the public now knows what that is. And I think that’s a result of this education program, and I think that’s the benefit that we’re seeing up there.

Q: On 112, the polling seems to be decently net no at this point, so if you’ll indulge me and we just assume a no on 112 scenario, can you talk to your strategy and the industry’s strategy post the election to make sure that this doesn’t come back in presumably higher turnout year in 2020?

NBL: Probably too early to get into specific strategies, nor would we want to in this forum. But I’d say it’s fair to say one of the things that this has highlighted this year and brought a lot of good conversation together is that no one wants to go through this again. Whether you talk about voters, whether you talk to industry, investors, government, I think that’s a strong alignment.

The good part about this, if you will, the bright spot of having this out in front and driving this conversation is the discussions with the leaders of both parties in Colorado recognize that particular fact. I think the other part of that is everybody wants to drive longer-term solutions, so that this doesn’t come back in a couple years.

I would say that that’s something that has been in our repertoire, if you will, when you look back at, and we’ve got experience here in this arena: how we’ve dealt with putting a framework in place to address longer-term impacts in Israel; how we dealt with helping the industry return to work in the Gulf of Mexico post Macondo, getting the first permit; the engagement with the government in Colorado on progressive air regulations. So I think this is something that I think Noble Energy can help play a key role in going forward, and we will.

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