What happened

Shares of oil companies with large-scale operations in Colorado surged on Wednesday after voters in the state defeated a ballot proposal that would have limited drilling. Leading the charge higher were SRC Energy (NYSEMKT:SRCI), Extraction Oil & Gas (NASDAQ:XOG), PDC Energy (NASDAQ:PDCE), and HighPoint Resources (NYSE:HPR), which all surged double digits in early morning trading. Meanwhile, oil giants Anadarko Petroleum (NYSE:APC) and Noble Energy (NYSE:NBL), which are also large producers in the state, rallied more than 5% after the election.

So what

Voters in Colorado rejected Proposition 112, which would have significantly increased the distance new oil and gas wells needed to be from homes, businesses, and waterways. If approved, the measure would have required that new wells be set back at least 2,500 feet from homes and businesses, up from 500 feet, which would have significantly limited the industry's ability to drill new wells. In the industry's view, the setback rule would have effectively banned drilling on 85% of the state's nonfederal land, which could have caused output from the nation's fifth-largest producer to drop 50% in the next three to five years.

A drilling rig with mountains in the background.

Image source: Getty Images.

However, with the proposition defeated at the ballot box, oil companies in Colorado can continue drilling on private land with the current setback rules. That's a big win for drillers focused on the state, given the growth potential of its DJ Basin. SRC Energy, for example, owns land in Colorado only, so the new rules would have limited its growth prospects. But it now has the freedom to drill the 1,700 high-return locations it controls in the state.

Extraction Oil & Gas, likewise, operates solely in Colorado. Because of that, it had a lot to lose, especially since the company has 3,700 drilling locations remaining, which will last it 20 years at its current pace. With the current setback rules staying in place, it can continue tapping its inventory to drive its production higher in the coming years.

HighPoint Resources also had a lot on the line since it recently bought fellow Colorado-focused driller Fifth Creek Energy to bolster its position in the state. With that deal starting to pay dividends, and Proposition 112 failing, HighPoint Resources is on pace to deliver a significant increase in production and cash flow in the coming years.

Meanwhile, diversified oil and gas producers PDC Energy, Anadarko Petroleum, and Noble Energy are also rallying on the defeat of Proposition 112. While these drillers didn't have as much to lose because they also operate in other areas -- such as Texas or internationally -- each one saw Colorado as an important part of their future if allowed to continue drilling. PDC Energy, for example, has 1,500 remaining drilling locations in Colorado, triple what it holds in Texas' Permian Basin. Because of that, it's a key fuel in the company's plan to grow its production at a 30% compound annual growth rate through 2020. Meanwhile, Anadarko believes it's sitting on more than 2 billion barrels of recoverable resources in Colorado, which could allow it to grow its statewide production from 250,000 barrels of oil equivalent per day (BOE/D) up to 400,000 BOE/D by 2021. Noble Energy, likewise, sees the DJ Basin as being a major growth driver.

Now what

Proposition 112 would have been a major setback to Colorado's oil and gas industry if voters approved the measure. But because they defeated it, the industry can continue drilling new wells throughout the state, which will create more jobs and provide an economic boost to the region while also powering growth for oil and gas companies that staked their claim on the state's oil-rich DJ Basin.

Matthew DiLallo has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.