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Gold/Mining/Energy : Big Dog's Boom Boom Room -- Ignore unavailable to you. Want to Upgrade?

To: jim_p who wrote (22992)	5/24/2003 8:16:51 AM
From: quehubo	Read Replies (2) \| Respond to of 206209

So what does it mean in the end? The E&P's must start exploring, can future oil prices support the E in E&P?

To: jim_p who wrote (22992)	5/24/2003 9:31:34 AM
From: Ed Ajootian	Read Replies (2) \| Respond to of 206209

Jim, Yes and the question of the day is whether this was just an aberation or truly indicative of a secular change in the economics. I believe the answer's somewhere in the middle. Off the bat I can think of two things that may have made the '02 stat so high, that don't relate to the field economics. 1) From looking at the SEC PV10 disclosures of reserve additions in a lot of 10K's and comparing them to what companies had been saying they thought they had discovered during the year, it seemed that the difference was much more dramatic than it has been in previous years. I believe the petroleum engineering (PE) firms that do or review those calcs all got religion this year, probably due to all the Enron debacle etc., and started to really raise the bar on just how much reserves could be booked from a discovery. They also made companies make a lot of downward revisions to previously booked reserves. The days of the "perma-PUD" (i.e., PUDs that get booked by stretching the definition of proved reserves, but which the company has no intention of ever drilling) are now pretty much over. 2) The standard calculation of F&D costs has an inherent inaccuracy to it due to the fact that, when you spend money to drill out a PUD, those costs go into your numerator, yet you get nothing added to your denominator (unless the new well gives you more info about the size of the reservoir, etc.). I believe a lot of companies were more focused on this kind of drilling in '02 vs. previous years, due to the lack of good prospects coming online. To Que's point, I believe the current high natty prices will spur more exploration. The US lower 48 is a mature resource at this point, and we are just trying to squeeze more blood from a stone. The majors and the large independents realize this and when they set their budgets for this year, did not plan to spend huge amounts for new exploration in the US. But when they see the price of the 12 month strip starting with a "6", it becomes time to go back to the drawing board. It becomes worth their while to find more blood to squeeze, even if its gonna cost $2/mcf to find it. So we see things like El Paso Production going out and borrowing $1.2 billion to drill holes in the ground. Hey que, you think rig counts are going nutty now, wait about a month from now, when that money that EP just raised is gonna start translating into rigs going. EP itself will probably be adding 10 rigs a week! But all that having been said, I don't understand why more companies are not going on acquisition rampages at this point. You can easily buy choice O&G properties for far less than $2/mcfe these days, and the risks you take in buying reserves are far less than in drilling for reserves. You can buy the reserves and then set hedges out 2-3 years and presto, you have just locked in at least your return of capital, and whatever the wells produce after that is gravy.