?“The sun will come out tomorrow. You can bet your bottom dollar that, tomorrow, it will shine…,” Annie sang on Broadway. I’d like to take her bet, but then again, what is a dollar worth when the U.S. Treasury is printing money every day to prop up bankers, mortgage-holders and the auto industry?


No number or data point is sacred. The situation on the ground for oil and gas is changing so fast that analysis or predictions from the experts could be moot. If you want to talk about target stock prices, earnings projections, the rig count, oil and gas production, access to capital, your 2009 budget—or anything else that has a number attached to it—it’s a crap shoot.


Kind of like listening to Congress trying to figure out how to bail out the country.


It’s unnerving. That’s one reason why it was a pleasure in early December to get out of the office and go out amongst independents and field people in the “real” oil patch in Midland, one of my old stomping grounds. (I lived there from 1975 to 1980.)


We drove north of Midland to the sites of field operations for Range Resources Corp. and Apache Corp. in Andrews and Gaines counties, respectively. The sun shone, the wind blew sand into our teeth, flags whipped out straight from the rig masts, and we even saw a few cows and a couple of scraggly trees.


What do energy seers think about 2009? Most think the first half will be a challenge, with a possible recovery starting in the second half. Some warn of a pending natural gas glut. The new administration is likely to support gas development, “although it competes directly with some alternative fuels and does not meaningfully reduce reliance on foreign oil,” Standard & Poor’s reports.


Any prognosis can change in an instant. Baker Hughes revised its prediction for the U.S. rig count, saying it would decline by even more than the 200 to 250 rigs it forecast in October. Initial signs show operators are laying down rigs in marginal and conventional plays, rather than in unconventional shale-gas plays, according to a Calyon Securities (USA) Inc. report.


Independents in Midland said they remain optimistic for the long term, but they want service costs to come down the way commodity prices have. If not, they will lay down more rigs. Chesapeake Energy Corp.

succumbed to reality and cut its 2009-10 budget for the fourth time in as many months, finally earning the approval of investors.


Analyst Ben Dell of Bernstein Research said in a recent research note that, in the next six months, crude oil prices should be driven by the near-term supply-demand balance. “Demand is likely to continue to dominate, given the relative weakness and the decline in GDP, while supply trends are unlikely to change the outlook,” he says.


“Our analysis of marginal North American production suggests as much as 1.3 million barrels of daily production could be shut-in through 2009-10. Indeed, non-OPEC production shut-ins and a rebound in OECD oil-demand growth should lead to a turnaround in the oil price.


“We believe an up-cycle is likely to begin by the end of 2009 or start of 2010. The main driver will be good old supply and demand. Falling spare capacity will also put further upward pressure on crude prices, potentially above the marginal cost.”


Meanwhile, the strong, hopeful E&Ps with enough cash to keep drilling, especially in shale plays, do so. At press time, we took heart in that Exco Resources Inc. announced completion of its first Haynesville horizontal well, in DeSoto Parish, Louisiana. After a nine-stage frac, the well’s initial production rate was an impressive 22.9 million cubic feet of gas per day with 7,800 psi of flowing casing pressure.


Lucky Exco owns a 100% working interest and 75% net revenue interest in this well, and substantial acreage in the core area of the Haynes­ville play, much of which is held by shallow production. It plans to drill 25 or more horizontal Haynesville wells in 2009.


“This well is the largest single well in our company’s history and represents the first of many horizontal drilling locations that we have in the Haynesville play,” chairman Doug Miller said.


This kind of tantalizing success and promising future will carry a few lucky companies through 2009, as long as gas prices do not stay below $6.


Some New Year’s resolutions are in order for the rest of the oil patch. Keep living within cash flow. Reduce debt. Stay friendly with your bankers and private-equity providers. Do whatever you can to foster more midstream capacity. Don’t lay off anyone—you’ll need that intellectual capital for the turnaround in 2010. Work with the IPAA, API and your legislators to monitor Congress to make sure the oil and gas industry doesn’t get the short end of the stick.

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