This October issue has so many gems of wisdom. You'll learn more about the pros and cons of upstream MLPs, why Ray Hunt thinks a company's culture matters first and foremost, and what seasoned A&D specialists think of the acquisition market.

But within our special report on Canada, you'll find this sage advice: "Build a company to sell and it might not last; build one to last and it will always sell."

That's according to David Johnson, chief executive officer of Calgary-based, publicly traded ProEx Energy. With a market cap of about C$750 million, ProEx is focused on finding natural gas in northeastern British Columbia.

Johnson's remark was made in connection with the fact that in Calgary, so many start-ups and juniors can access capital easily, acquire assets and build their production to about 5,000 barrels of oil equivalent per day, then sell to others-and they start all over again.

It brings up a million-dollar question: What does it take to build a company to last?

Do CEOs and their investors even want to own something that lasts anymore? Or do they favor the business model of build-it-and-flip-it-soon?

Whatever their chosen formula, many U.S. industry veterans are accessing capital easily and starting on the build-up road. I expect they'll have a good run over the next five years, if they can find enough of the right assets to buy-and can compete with the voracious herd of MLPs trying to do the same. Even before the MLP boom began, asset values had been climbing steadily, as were finding and development costs.

There is no shortage of former E&P owners and executives willing to race. Roger Jarvis, who ran Spinnaker Exploration, Mike Harvey of Gryphon Exploration, Lisa Stewart of El Paso Production, Randy Foutch of Lariat Petroleum, Don Wolf of Westport Resources, and Paul Rady of Antero Resources, are but a few of the people starting over. In the past 12 months or so, they collectively have garnered private-equity commitments of roughly $5 billion.

What will these super-jockeys find out on the track? First, the pace of the start-restart model is faster. Denver-based Bob Boswell (former CEO of Forest Oil) formed Laramie Energy LLC in May 2004 with an initial private-equity commitment of $150 million. He sold the company this summer for about $946 million and has started Laramie II. George Solich, also in Denver, has already funded and started Cordillera Energy Partners III before II has been fully monetized.

Second, the MLPs are coming up fast on the inside. Highly motivated by their need to maintain production and grow distributions, and thanks to a lower cost of capital, MLPs frequently reach the finish line first.

Third, the nature of the reserves left to drill may be permanently changing. Unconventional natural gas commands plenty of drilling dollars today. Consulting firm Wood Mackenzie calculates that by 2010, some 42% of U.S. natural gas supply will come from unconventional resources such as tight gas, gas shales and coalbed methane. All are expensive to pursue.

Fourth, it's tougher to replace production. IHS vice president Pete Stark points out that Lower 48 gas production decreased from 2002 to 2006 even though annual gas-well completions rose 64% during that time. In this issue, Sanford Bernstein analyst Ben Dell notes the amount of reserves tapped per well is trending lower for a group of 21 independents he follows, even as they drill more wells in low-risk unconventional plays.

In recent IHS presentations, Stark has pointed out challenges to U.S. gas productivity, with the Rocky Mountain region an interesting example. "Rockies gas completions increased 61% from 5,390 wells in 2002 to 8,700 wells in 2006. In perspective though, the Rockies' [resulting] gas production increase has only offset one-third of the corresponding annual production decrease of almost 1.5 billion cubic feet (Bcf) a day in the Gulf Coast region." Ouch.

This ties in with what Byron Wright of El Paso Corp. said at a recent meeting of the Houston Energy Finance Group. By nature of its vast pipeline network and its own gas production, El Paso "touches about one-quarter of the gas on its way to market in this country," he said. What does El Paso see?

"Shifting gas supply will change gas flows in North America," he said. "We see growth in the Rockies and from shales and LNG, but declining amounts from Canada. Gas demand is tilting north and southeast, but supply is tilting west and south."

El Paso sees Rockies supply rising from 7.3 Bcf a day now to 9.6 Bcf by 2011. From the shale-Carthage corridor in East Texas/North Louisiana, it sees daily production ramping up from 7.6 Bcf now to 10.4 Bcf by 2011. And from liquefied natural gas (LNG), it sees a huge daily average inflow, rising from 1.8 Bcf in 2006 to as much as 8.1 Bcf by 2011.

Wright thinks the marginal cost of developing gas in the U.S. will set gas prices more than LNG imports will, and he foresees a band of $6 to $7 gas for some time to come.

Comments