"The majority of questions coming into our business concern gas markets, resource plays and MLPs," Dan Pickering, principal and founder of Pickering Energy Partners, Houston, told Houston Producers' Forum members recently.

Pickering calls the MLPs (master limited partnerships) "magic little pills." They are in favor on Wall Street, but not all assets are appropriate, and a boom or bust situation is possible, he added. "The predictability of long-lived reserves is popular on Wall Street. Offshore is out of favor."

The MLPs are a $180-billion enterprise. "Most of that is in the pipelines. E&Ps are $7- or $8 billion of that." Investors like the fact that 90% of gross profit must be associated with natural resources, and that MLPs have been a high-yield, high-growth financial structure in recent years.

The right kinds of assets are needed to form an upstream MLP, such as long-lived reserves, a high tax basis, low-maintenance capex, and an opportunity to drop down assets and acquire more assets. "It's changing the way investors value stocks," Pickering said.

"Don't look a gift horse in the mouth. Just be sure it's the right kind of horse."

Regarding resource plays, "there is a land rush going on. There is a lot of acreage being acquired without a lot of information associated with it." However, he said, there is definitely a rationale for the land-rush mentality.

"Southwestern Energy Co., whose stock has gone from $5 to $45 wound up with 800,000 acres in the middle of a really good play and they did that by getting a bunch of acreage quietly."

On the other hand, "about a year and a half ago, West Texas Barnett (shale) was going to be a monster. And, to date, it has been pretty disappointing. It's deeper, it's more expensive, and it's not as productive. It's not always wine and roses."

The potential first mover has an advantage. Buying acreage before having data is risky, the costs are not trivial, and wins aren't guaranteed, but the risks will be well rewarded as long as the resources are there, he said. "What's there is there, and your ability to get it out ultimately drives the value."

Regarding natural gas prices, "we're in an up cycle, and it feels like it's got legs to last another couple of years." Gas prices have been bouncing up and down, and Wall Street tends to magnify that volatility. But stocks are tougher than the cycle, and the high prices should last for two or three more years. Pickering advises companies to move ahead with plans and ignore the stock market.

"When it's volatile, some people are too timid, but that's when it's time for the rest of us to be opportunistic."

Gas supply from U.S. onshore production is up. The onshore rig count has tripled and production has risen from 42 billion cubic feet (Bcf) per day to 48 billion. "The big question is, are we leveling off?"

Offshore production has declined. "The Gulf of Mexico is in freefall. Production, previously at 13 Bcf per day, has fallen to 6 Bcf-cut in half."

Also, Canadian rig counts have fallen and U.S. supply from Canadian production is significantly down. "But when gas prices equalized, drilling got back to normal. Still, they are nervous about sustainability."

On the other hand, the U.S. is importing a record amount of liquefied natural gas (LNG)-4 Bcf per day, up from 1.6 billion in 2006-and is at capacity in terms of receiving terminals. By 2010, if four new facilities are built, the U.S. may be able to receive up to 15 Bcf of LNG per day. U.S. gas consumption is some 60 Bcf per day now.

He expects a pleasant spring and rocky fall. Net daily gas supply is up by 1 Bcf, but some of the increased supply has to go into storage, and storage capacity-some 3.5 Bcf-is constrained. "Gas prices are nine bucks right now and that's a pretty good number."

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