Is the run-up in energy stock prices nearing the end of the deck? Or is it an eight-deck shoe? Upstream stock prices have been front-loaded with blackjacks for sellers. Are there any aces left? Will buyers now be left with just bust cards and regrets? Tom Petrie, chairman, president and chief executive of Denver- and Houston-based investment-banking firm Petrie Parkman & Co., says there are many good years ahead for producers' cash flow. "Oil and gas prices are likely to remain materially higher than has been factored into expectations by the public marketplace and, to a degree, by the industry," he tells Oil and Gas Investor in this month's supplement, One-on-One, a collection of interviews with top industry executives. Petrie applies a type of 80/20 rule to his oil-price forecast. "Another way to think of it is that we're probably in something like a $50- to $70-per-barrel oil-price environment 80% of the time in the balance of this decade, and, in large part, the other 20% of the time we're likely to be above $70. The main way we would test down to $50 and lower would come about by a further spike in prices somewhere north of $85 and perhaps north of $100." Most producers are currently in good enough financial shape to withstand lower oil prices, he adds. "The last time we had prices test the low end of the range after a long period of upward price movement, companies had become overlevered; that's not typically the case today. Three years from now, if companies have levered up after embracing these new, higher prices, that conclusion may be different, but that's not the case today." Lower oil prices-$50 or less-would be self-limiting: producers would suspend a great deal of their drilling plans, thus reducing supply and propping up prices again, he adds. The concern for U.S.-focused independents' balance sheets today is not so much forward oil prices but gas-price futures. Petrie is optimistic. "Right now, because there is so much pessimism about natural gas, the contrarian in me would like to put more emphasis on gas than oil because gas is not subject to quite the insecurity premium that we're seeing built into oil prices." Producers are continuing to increase their bets. Energy-investment analysis firm John S. Herold Inc. reports that overall M&A transaction value and deal counts globally have rebounded from a sluggish first quarter, and acquisition costs continue to set new records. The global implied, average price paid in the quarter was US$15.21 per proved barrel of oil equivalent (BOE). In the U.S., the implied mean was US$18.26; in Canada, US$24.99. "The brisk M&A activity was highlighted by Anadarko Petroleum Corp.'s plan to acquire both Kerr-McGee and Western Gas Resources at a combined $19.9 billion in reserve value," the firm reports. The deal represents 42% of second-quarter global M&A value. Some of the deals evaluated by Herold in the second-quarter analysis are by Asian national oil companies (NOCs). U.K.-based energy research firm Wood Mackenzie reports in this issue that, while NOCs' acquisitiveness across the globe has been noteworthy, they aren't writing blank checks. Actually, ConocoPhillips paid more for Burlington Resources-$48 per BOE of reserves-than any other deal in the past few years, and Apache Corp. paid some $46 per BOE for BP's Gulf of Mexico shelf properties. Meanwhile, CNOOC Ltd. bailed out of a bidding competition for Unocal Corp. last year at Chevron Corp.'s ante of $35 per BOE. (See "Asian NOCs" in this issue.) Oil prices appear to be secure, as events in Venezuela, the Middle East and Korea continue to alarm traders. As for U.S. natural gas prices, the dealer is showing an ace. Want to buy insurance?

Comments