The outlook for the oil and gas industry has improved considerably from the somewhat gloomier perspective seen at the start of 2007, according to E&P and oilfield-service executives speaking at Simmons & Co. International's seventh annual energy conference recently in Las Vegas.



Fortunately, investors also appear to be "slowly awakening from their cautious lethargy" induced by the "numbing volatility of the past nine months," Simmons' research team says in a report summarizing the event.



"...Energy fundamentals are in considerably better shape than reflected by current public-equity valuations for energy stocks. To be sure, the broader market volatility has been a hindrance and a meaningful distraction."



Speakers from Halliburton, Weatherford International and Smith International, and from several E&P firms, agreed that North American oilfield-service prices are stagnating, and in some cases going down 10% to 15%. The drilling-activity low point was seen in fourth-quarter 2006.



Softening service costs may not necessarily lead to increased rig counts, however, as the E&P speakers instead said they will improve their margins or use cash for other purposes.



The service-company speakers said 40% of their revenues now come from abroad and they expect the Eastern Hemisphere to be the source of their fastest growth for many years to come.



XTO Energy Inc. president Keith Hutton and Chesapeake Energy Corp. chief financial officer Marc Rowland agreed that the U.S. industry as a whole will have a hard time increasing production this year due to accelerating decline rates and a flat rig count through the rest of the year.



In unconventional gas plays, the first-year decline rate is up to 70% on average, they said.



The E&P speakers said private-equity firms are knocking on their door, the Simmons analysts report. "All participants confirmed private-equity interest in E&P stocks, but said the high-leverage nature of going private challenges operating capabilities despite the ability to hedge."



All participants said they expect natural gas prices to stay in a band of $6 to $10 per million Btu and they will look to add more 2007 hedges if the price exceeds $8.

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