Because there is still talk of retreating commodity prices on the horizon, many smart management teams have built that possibility into their project plans, according to a panel of banking executives at the recent Cambridge Energy Research Associates conference in Houston.

There are newer E&P players on the scene and greater amounts of capital are being deployed, but Bill Montgomery, head of Goldman Sachs' natural resource group, said executives are still being careful. "The capital deployment I see is still disciplined. These teams haven't attracted these pools of capital because they're stupid."

Even the larger oil and gas companies are choosing cautious optimism, running their big projects against price decks that are below spot prices for oil, he added.

Andrew Safran, managing director and global head of energy, power and chemicals, investment banking, Citigroup, agreed. "There is a tremendous amount of liquidity out there for many companies, but also a great amount of discipline in the deals and projects that are being done."

Montgomery said many of the smart IPOs and company projects coming down the pike work at $64 oil-but they will also work at $52. Even so, not all of the companies will survive. Those that don't generate sufficient free cash flow for several consecutive quarters will quickly have a newfound position in the M&A game, he warned.

Credit ratings will be another hurdle for some. "Some of the acquisitions we've heard about are being done at seven to eight times leverage or higher," said Chansoo Joung, managing director, Warburg Pincus LLC. "So, credit issues could definitely create some negatives for certain companies."

While the market is more volatile now than it has been historically, Safran said, "Looking at the market, there's still a bias on the upside. Though there's plenty of capital flow, there's not really a 'new breed' of investors in energy. The focus on energy is just expanding.

"For example, while some private equity traditionally focused on midstream or service companies, it's been interesting to watch these firms play in the upstream arena. They're now buying reserves that the public companies don't want, and some great deals can be made this way."

While hedge funds are contributing to the heightened deal flow in oil and gas, they often have a different kind of relationship with the companies in which they invest, Joung said.

"They don't launch companies that they have to live with for years. On the other hand, we are seeing more equity sources become more industry-specific about their investments."

Looking ahead, the group expects pricing volatility to continue, with oil prices bouncing around between $40 and $60 for several quarters to come. Weather and politics still have the potential to affect pricing on a large scale, they said.

"Also, we're looking at getting oil from some pretty risky places down the line, which adds more volatility to the picture as a whole," added Marie Fagan, CERA director, institutional investors service. She expects oil prices to soften to about $49 through 2010.

Meanwhile, fluctuating commodity prices haven't stunted investor interest, Joung said. In fact, that's increased the number of "turkey deals" that have landed on the firm's doorstep looking for funding. "It's the classic hammer-looking-for-the-nail scenario, and what was absolutely absurd years ago looks probable to people now."

The panel agreed that ethanol and alternative energy projects are gaining more momentum, and more alternative-energy management teams are expected to hit the ground running in years to come. "We like the long-term prospects for ethanol," Joung said. "We're taking a look at where we can participate as it really catches on."

Montgomery called the ethanol market "frothy," and said a handful of ethanol IPOs didn't do as well as some executives hoped. While public sentiment has become more positive about nuclear alternatives, there are serious environmental issues and the start-up costs are astronomical, he said.

"But it has to happen. It will happen during the next 10 years. There won't be shovels in the ground tomorrow, but there's a lot of money available for nuclear projects. Lenders are no longer scared to put their toe in it."

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