Rocky road for Colorado drillers as regulatory clampdown looms

HOUSTON (Bloomberg) -- Months after a pair of deadly explosions in the Colorado oil patch, drilling stocks remain hobbled by the specter of a regulatory clampdown.

Explorers like Extraction Oil & Gas and SRC Energy, which are focused entirely on an oil and gas field northeast of Denver known as the D-J/Niobrara Basin, aren’t fully benefiting from soaring energy prices because of concerns about their future freedom to drill. Shares of those operators are undervalued, having gained only half as much in the last six months as geographically diverse drillers, said Welles Fitzpatrick of Suntrust Robinson Humphrey.

Colorado’s energy industry was rocked in April and May when explosions at two Anadarko Petroleum sites killed three north of Denver, raising questions about the safety of oil and gas operations close to population centers. Regulators ordered widespread inspections while environmental groups stepped up efforts to tighten rules.

As a result, investors aren’t willing to give Colorado drillers “the premium they deserve” because “of perceived regulatory issues,” said Fitzpatrick, a managing director.

Explorers have been eager to revive a section of the D-J/Niobrara region known as the Wattenberg field, a 1970s-era discovery that yielded massive amounts of gas for decades. When new drilling and fracking techniques were imported from the shale fields of Texas and North Dakota, vast reserves of crude were unearthed, spurring a land rush. Still, the Wattenberg has a long way to go before reaching the frenzied valuations of the Permian Basin: drilling rights in the area cost just 58% of those in the Permian, according to RS Energy Group.