Oil and gas executives told many solid stories of pending production growth and strong cash flow at the annual Howard Weil investment conference in New Orleans recently. But most investors, while impressed with the long-term outlook, adopted a wait-and-see attitude. One executive lamented that institutional capital is "dead money." "Until the Iraqi war is over and we see some resolution about that and the economy, I am just holding," conceded one buysider, echoing the thoughts of many attendees. Several investors said they are market weight now, which means holding an amount of energy equities equal to their makeup in the S&P 500-currently about 6%. Nevertheless, Howard Weil president Bill Walker told attendees he has never seen such strong industry fundamentals. He cited high commodity prices and the continuing decline in U.S. gas production-a recurring theme at this year's conference. "This year some things remain the same," he said. "We continue to see a lack of quality drilling prospects. We continue to see capital discipline and consolidation, which does not necessarily lead to more drilling. The difference this year is the war in Iraq, and that the federal government, through its Deep Shelf royalty relief, finally woke up to the fact that we have a gas-supply problem in this country." Walker outlined the purpose of the conference: "We hope to resolve two issues in the next few days: If not now, why not? If not now, when?" In its first-ever presentation at this investment conference or any other, Schlumberger unveiled new strategies to return to Wall Street favor after two difficult years. "I'm not sure, but maybe being named keynote speaker at 8 a.m. is punishment for refusing to speak at any investor conferences in the past," joked new chief executive officer Andrew Gould. "I know many of you have been concerned and we pledge to communicate better. We now have a clear set of objectives." Those goals are to improve return on capital to double digits within two years, grow earnings per share at a rate higher than growth in revenue, grow oilfield-service return on sales from10.6% in 2002 to cyclical peaks above 15%, and establish a consistent 12% pretax return on seismic activities. Divestitures will occur, he said. The company believes it must rank first or second in market share in each industry segment in which it has a presence. Its highest growth rates since 1996 have been in services for production, not exploration, he said. Schlumberger emphasizes project management and total field integration. It has 80 active rigs under management for 47 projects under way in 40 countries. "The markets for our services and products are changing. For example, we've seen a steady increase in revenues from the national oil companies." The company recently won a $600-million contract from Pemex. In addition, all forms of information technology will become increasingly important to the company and its clients, Gould said, as the industry fights the decline curve. Customers must be convinced, however, that the price paid for services is worth it. Technical spending now accounts for about 30% of total industry E&P spending and has been steadily increasing, he added. "By 2010, we can safely predict there will be fewer new fields, a lot of development activity, and a new wave of exploration will have begun." Another company seeking to regain Wall Street nods is Anadarko Petroleum Co. Chairman and recently restored CEO Robert Allison reminded attendees that the Houston company's former stock-price premium, largely thanks to exploration success, enabled it to outshine its peers for several years. That has disappeared in the last two years. "I can assure you I don't like it and our board doesn't like it. You'll see more emphasis on growth and profitable growth from us," he said. Like many independents at the conference, the president of EOG Resources cited lower U.S. gas production, and then touted his own prospects. "In 2003 we will concentrate on drillbit growth," said Ed Segner. "We drilled 1,800 wells in North America last year. We increased our Canadian production alone by 23%. Total reserves were up 9% to 4.6 trillion cubic feet equivalent." EOG will spend about the same as last year, but will underspend cash flow so as to reduce debt or buy back more shares. Since 1998, it has reduced the number of shares outstanding from 160 million to 114 million. A recent UBS Warburg survey found that among its peers, EOG has the most conservative accounting, with a clean balance sheet and no goodwill on the books, Segner said. Raising the dividend is also a possibility, he added. U.S. gas supply has averaged 52 billion cubic feet (Bcf) per day for eight years, but will be about 48.6 Bcf per day in the next year, Segner said. This is the lowest level in 18 years. Production is likely to fall another 1% to 3% in 2003. Segner said the company would like to add another core area internationally to complement strong activity in Trinidad. It has just entered the U.K. North Sea and is looking for more opportunities there. "If we look back five years from now and ask what we undervalued in the company, it will be Trinidad. It is going to be a major supplier to the U.S." Burlington Resources is back on track. "We are attracting a much broader shareholder base to the story," said CEO Bobby Shackouls, "after a four-year repositioning. We project modest growth of 3% to 8% over the next few years from projects we have in hand today." Last year Burlington's stock rose more than that of its peers. In first-quarter 2003, the company bought back 1.7 million shares. Shackouls sees this as a way to buy his own gas reserves for $1.10 per thousand cubic feet. "And we are selling that gas for $5 or $6, so that is good arbitrage." The nontaxable merger of Devon Energy and Ocean Energy was to close April 25, just two months after the deal was announced, said Devon chairman and CEO Larry Nichols. Devon's strong North American gas position is enhanced by Ocean's international and deepwater exploration expertise, he said. The result should be a multi-year growth profile and greater financial staying power. The company will also have asset power, said Ocean's Jim Hackett, who will be Devon's president and chief operating officer. Some 27% of production is from Canada, 23% from the Midcontinent and 22% from the Gulf Coast region. Devon dominates North American gas output, ranking ahead of ChevronTexaco and Royal Dutch and tied with EnCana. -Leslie Haines

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