More than 40% of E&P industry leaders believe upstream MLPs are good for the U.S. industry. Approximately 60% believe they are bad for the U.S. oil and gas exploration and production business or are unsure right now.

This is according to a brief survey of some two dozen E&P decision-makers listed in the Oil and Gas Finance Sourcebook. Participants include some who are with E&P companies that are MLPs or have announced they are forming MLPs; others are with traditional private and public producers.

"MLPs are cheap financing vehicles for E&Ps and less likely to fail than the 1980s MLPs due to suitable assets involved," one executive said. "Even so, somebody will figure a way to screw them up and, in the early 2010s, we'll be back to rolling them up."

Another producer says, "I'm not sure if all MLPs on the drawing board today have solid business models that truly reflect the investment expectations of an MLP unit-holder. It seems like a lot of frenzied 'herd mentality' capital is pouring into these IPOs that may get burned in the not-too-distant future."

Another executive says, "MLPs are the newest way to bring value to mature long-lived assets. Many companies can enhance their valuations by moving these assets into MLPs. However, the key will be to keep the MLP production constant for many years.

"Companies that have additional assets that can be developed and dropped down into existing MLPs to cover production will be better positioned. There should be concern that many will not deliver as expected or even fail. The next question will be, 'How does the industry respond?'

"Another concern is that the MLPs, as did the Canadian trusts, can afford (to pay) higher (acquisition) multiples, and conventional E&P companies are hard-pressed to compete for the assets. Long-term commodity-price and operations costs are real issues to be considered in MLP valuations. Another question may be, 'How do the majors respond to MLP opportunities?' Much of the majors' U.S. onshore production will fall into this category."

On the matter of upstream M&A, 82% report they believe a major oil will buy a large U.S. independent in the next 12 months. Among the others, 9% disagree; 5% say this will happen but not that soon; and 5% said they are unsure. None said this will never happen.

One producer said, "I think the most likely combinations, rather than majors buying large independents, will be reverse-mergers with majors on the sidelines and smaller fish swallowing the larger fish and taking the combination forward."

As for what are the hottest U.S. upstream investments today, 76% said shale gas. Among the others, 5% said the Rockies; 5%, Gulf of Mexico; and 5% provided other responses, which included shale gas, tight sands, any "resource" play, and any unconventional drilling opportunities. Another response cited the MLPs.

Among general comments, one executive said, "It takes long lead times to create great prospects. It is harder to sustain great teams. Less than 10% of geologists and geophysicists are true oil and gas finders. Can we pass the needed exploration skills to the next generation?"

Oil and Gas Finance Sourcebook, published by Hart Energy Publishing since 1989, is an online database of energy financiers, capital providers and asset buyers.

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