Regulatory Risk Comes To New Mexico Oil: Who's At Risk?

by: Josh Young

Regulatory risk caused large scale under performance of Colorado focused oil and gas companies.

State legislators in New Mexico are proposing a 4 year fracking bans.

Which companies are most at risk.

Colorado elections were in the headlines in November 2018, as a proposition to severely limit drilling and fracking was up for a vote. Despite the proposition being defeated, the negative regulatory risk introduced ahead of the election and subsequent to it sent local focused companies shares down much more than peers.

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With the oil and gas equities index (XOP) down 8% in the past year, Colorado exposed oil and gas producers traded down anywhere from 22% for the least exposed (APC) and (NBL) to down 43% - 66% for the most exposed (XOG) and (HPR). This under performance was sustained even subsequent to the November election, possibly because of the risk of regulatory action at the state legislature level.

Now, the shadow of regulatory risk is falling on New Mexico. A four year fracking ban was introduced by a New Mexico state senator, Senate Bill 459. The case for it is as follows:

"Lopez began her introduction of the bill, “Two other states have banned fracking because of their concerns of potential impact on their environment, public health and water. Oil and gas is one of the many precious resources that belong to the state. Yet, we have not passed a law that regulates its extraction since 1935.”

She acknowledged the oil and gas industry is powerful and well-organized.

“I’ve seen that very clearly in the last few weeks. But we represent the people of this state,” Lopez said. “The people have directed us to protect the healthy and beautiful environment in Section 20, Article 21, of our Constitution.”

Urging passage of her bill, Lopez said pausing for four years would give the state time to study produced water, methane release and royalty issues."

The response to the senator's case was:

"The Legislative Finance Committee last week issued a Fiscal Impact Report on the bill, stating the economic loss would exceed $3.5 billion. Meanwhile, the New Mexico Oil and Gas Association claimed fracking has been used to complete wells in this state for more than 50 years with none of the feared negative impacts."

Despite this coherent, compelling response, and despite the proposal not being scheduled to be revisited by the senate committee and not coming up for a vote, this is similar to how the potential of increased fracking regulations originated in Colorado, as explained here.

Without a path to even come to a vote, this is not a risk for companies actively drilling and fracking in New Mexico today. But considering the large scale under performance by Colorado exposed E&Ps when regulatory risk became more prominent, it is worth considering for longer term exposure to shares of companies with large footprints in New Mexico.

On the large side of things, companies with exposure include Exxon (XOM), Chevron (CVX), OXY (OXY), EOG (EOG) and Apache (APA). A good map showing their respective acreage positions was published by Bloomberg:

Permian Acreage Map Most exposed include Exxon, Oxy and EOG, while Apache and Chevron clearly have the bulk of their Permian acreage outside of New Mexico. Most exposed overall is a smaller operator, Matador (MTDR):

Permian Matador Concho (CXO) also has significant exposure:

Concho Permian NM As does Devon (DVN), which calls its New Mexico Permian exposure its "franchise asset":

Devon Permian

With the bill not coming up for a vote, investors in these companies should not panic. Every state regulatory and legislative process is different. But with two states with fracking bans already, and with performance of Colorado exposed oil and gas stocks painful once the regulatory risk was more prominent and better understood, it makes sense to consider regulatory risk in any oil and gas investment. And it makes sense to particularly consider that risk when evaluating companies with particular exposure to states where laws like Senate Bill 459 are being proposed.

Disclaimer: Opinions expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment adviser capacity. This is not an investment research report. The author's opinions expressed herein address only select aspects of potential investment in securities of the companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies' SEC filings, and consult a qualified investment adviser. The information upon which this material is based was obtained from sources believed to be reliable but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author's best judgment as of the date of publication and are subject to change without notice.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.