As capital providers push to continue meeting the needs of a burgeoning oil and gas industry, the results have been more non-traditional players on the scene and blurred boundaries between different types of investment vehicles. Hedge funds are one vehicle giving investors pause, a panel told annual Cambridge Energy Research Associates conference attendees in Houston last month. "If you look at volatility in the marketplace, short-term, given the bullish view, the implications for the securities market are strong-but long-term, structural issues are giving some investors pause," said Andrew Safran, head of Citigroup's global energy, power and chemical group. Hedge funds, which have grown in popularity during the past few quarters, have also added a new twist to the market. Ernst von Metzsch, managing member of Houston-based Cambrian Capital, said, "Hedge funds added liquidity to the market but I'm not sure that they've added to the volatility. I think that market volatility today-compared with 10 years ago-may not be all that different." William Montgomery, head of Goldman Sachs & Co.'s natural resources group, added, "People are way too quick to point to hedge funds as doing something bad to the market. I think they have a positive effect on the market. Keep in mind that just because you have people out there willing to buy the more exotic [investment] instruments doesn't mean the traditional debt and equity markets are going to go away." Safran said, "Oil companies are damned if they do, damned if they don't. They're having to spend some time threading the needle with their hedging policies." In the end, hedge funds are not having any impact on the long-term price of oil, Montgomery said. "At the end of the day, you have to deliver on the terms of the contract, regardless of price fluctuations." Nevertheless, the panelists agreed that investors and companies are having a vocal reaction to hedge funds' growing popularity as an investment vehicle. "People and management teams can worry about the proliferation of hedge funds out there now," Montgomery said. "If you're a company out there that has a strategic action that you're ignoring, now someone with an agenda can force management to do it. And it's not for control-it's for a headline that can embarrass them into action. There's been almost $1.2 trillion raised via hedge funds over the years and some of that is going towards private agendas." Some managements' trepidation over hedge funds may be a matter of perspective, Von Metzsch said. "Most people in our business don't understand how to run a corporation. I'm in investments because I'd be a lousy (E&P company) manager." Though there's plenty of funding available for energy projects today, the panelists don't expect a dramatic shift in the majors' current leverage. Safran said, "Oil companies learned many lessons in the 1980s." Montgomery added, "Many are taking that cash and doing stock buybacks, but very slowly out of the gate. They're doing it that way because they are still on the prowl for acquisitions." Von Metzch said, "There is no such thing as having too much money, but as for E&P company growth, you either have to make acquisitions or be lucky in exploration drilling." As for the projects oil and gas companies are choosing to fund these days, Montgomery said the markets are working perfectly. "The reason companies don't want to take their cash and back long-term, riskier projects is because the commodity prices aren't high enough, and there isn't a lot of conviction that $50 to $60 oil is here to stay." Von Metzch added, "If it stays high enough for long enough it will definitely motivate more companies to launch more mammoth-sized projects."

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