Encouraged by investor interest and the abundance of maturing oil and gas basins in the U.S. upstream trusts-some in the form of the master limited partnerships (MLP)-are making a comeback. With an asset model and operating strategy similar to that of the Canadian trusts, these companies are active acquirers that spend a lot of time developing-but not wildcatting for-sources of oil and gas reserves. What might this mean for traditional independent E&P in the U.S.? The vehicle is not new to the upstream. Houston-based Apache Corp. pioneered the E&P MLP in the 1980s, a decade shadowed by memories of crashing oil prices. Several oil and gas companies tried to follow in Apache's footsteps, but many used the wrong kind of assets and too much debt. Significant commodity-price fluctuations, poor reserve-to-production ratios and dwindling capital from public markets made keeping up with investor-distribution promises a struggle. Failure was imminent, and most upstream MLPs in the 1980s were either taken private, acquired, liquidated or converted into traditional E&P companies. "They were including assets in places such as the Gulf of Mexico-declining at over 30% a year," says John Kang, an analyst with RBC Capital Markets. "This didn't make sense because it put them on this treadmill of having to buy new assets or make new discoveries, spending a ton of capital along the way. Also, they were including risky exploration prospects instead of the less-risky development and exploitation plays." For more on this, see the January issue of Oil and Gas Investor. For a subscription, call 713-260-6441.

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