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Marketplace Has Its Own Logic

What Is Expected of You?

Let's say you're busy generating prospects, or perhaps bogged down in the day-to-day minutiae of implementing your company's business plan.

Either way, there's no time to focus on the never-ending gyrations of commodity prices and oil industry stock price movements. Yet the overall fallout from these daily events impacts everyone industry-wide -- for better or worse.

Then there's the omnipresent need for big bucks to fund a variety of activities, ranging from a one-well project to implementing a long-term business plan involving myriad drilling programs. Even if you already have a thriving company, it can be difficult to sift through the plethora of capital sources to find what's best for you in order to grow the business.

These are some of the thoughts behind "Show Me the Money -- How Wall Street Logic, NYMEX Traders and Capital Markets Impact You," a business forum slated for the AAPG Annual Convention in Houston, where noted industry experts will provide insight into the commodities markets, oil industry stock price drivers, where the big money is and what the capital providers expect from you in return for their investment.

In the commodities realm, all eyes were focused on natural gas by late February as the 2006 non-winter for much of North America was drawing to a close, leaving record amounts of gas in storage. While the "fear factor" of geopolitical worries/events are keeping crude prices generally above $60, there's been a real disconnect with natural gas, which zoomed upward to $15/Mcf last October only to plunge to the $6+ range at the end of February.

"Our number is 1.66 Tcf of gas in storage on 3-31," said Chris Theal, managing director of research at Tristone Capital. "There will be less demand this summer for refilling storage, so we're looking at a potentially pretty sloppy market near-term. The market is now trying to find a floor in gas prices."

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Let's say you're busy generating prospects, or perhaps bogged down in the day-to-day minutiae of implementing your company's business plan.

Either way, there's no time to focus on the never-ending gyrations of commodity prices and oil industry stock price movements. Yet the overall fallout from these daily events impacts everyone industry-wide -- for better or worse.

Then there's the omnipresent need for big bucks to fund a variety of activities, ranging from a one-well project to implementing a long-term business plan involving myriad drilling programs. Even if you already have a thriving company, it can be difficult to sift through the plethora of capital sources to find what's best for you in order to grow the business.

These are some of the thoughts behind "Show Me the Money -- How Wall Street Logic, NYMEX Traders and Capital Markets Impact You," a business forum slated for the AAPG Annual Convention in Houston, where noted industry experts will provide insight into the commodities markets, oil industry stock price drivers, where the big money is and what the capital providers expect from you in return for their investment.

In the commodities realm, all eyes were focused on natural gas by late February as the 2006 non-winter for much of North America was drawing to a close, leaving record amounts of gas in storage. While the "fear factor" of geopolitical worries/events are keeping crude prices generally above $60, there's been a real disconnect with natural gas, which zoomed upward to $15/Mcf last October only to plunge to the $6+ range at the end of February.

"Our number is 1.66 Tcf of gas in storage on 3-31," said Chris Theal, managing director of research at Tristone Capital. "There will be less demand this summer for refilling storage, so we're looking at a potentially pretty sloppy market near-term. The market is now trying to find a floor in gas prices."

Short-Term Downturn?

According to Jim Wicklund, managing director and senior equity research analyst at Banc of America Securities, high prices killed off some incremental demand.

He noted also the industry is coming out of winter not just with record gas storage but with production up 3 percent over 2004 levels (this normalizes out the impact of the hurricanes).

"We have a glut near-term, but it's short-lived probably," Wicklund said. "It's possible that natural gas prices could average $6 to $6.25 for the second and third quarters this year. At this price, we're likely to see a slowdown in drilling activity by the smallest U.S. independents as they wait for prices to come back up."

Theal expressed a similar opinion.

"If you look at companies and what they're budgeting in terms of cash flow this year," Theal said, "we think the real risk if we see further downside is we'll see trimming of CAPEX."

Wicklund anticipates maybe as many as 10 percent of the companies might wait to drill, which would trigger a noteworthy drop in the active rig count that's not currently being discounted by the stocks. He noted the stocks may drop more than the fundamentals do, but that's always the case.

The anticipated cutback in activity is not necessarily bad.

"For the E&P side, you get a lot of stupid people out who've been bidding up prices to unreasonable levels," Wicklund noted. "You flush the inefficient players out of the market, and you moderate the service costs to improve the economics of drilling. And it should foster increased activity in mergers and acquisitions."

Playing the Market

The capital folks see the bright side as well.

"Most capital providers out there are quite sophisticated, and those behind it are financially strong," said Jeff Jones, partner at Quantum Energy Partners. "You hear most all saying basically the same thing: A retreat in commodity prices is good news because it gives the providers more room to navigate financially. When prices are high, it's difficult to compete.

"Some of the more obvious targets from a financial point of view are acquisitions," Jones added, "and those were trading at unprecedented sales prices."

Andy Evans, vice president-E&P group at ARC Financial Services, is equally optimistic.

"We take a long-term approach in trying to look through the valleys of these short-term cycles," Evans said. "Storage is full, and spot prices have a lot lower to fall in the next few months, and we think that's a good time to invest -- as close to the bottom as you can get.

"We're interested in finding new companies at this part of the cycle and look to support drillers -- those that get after the drill bit strategies," Evans said. "Also, we think there will be more farmouts available, especially from the big companies that face big land exploration problems here in Canada.

"We're cautious in our investing in high marginal cost plays," Evans noted. "We tend to focus on low finding and development costs -- in the end, it's the low cost producer that always wins."

If you're interested in going all out by seeking major funding via the public arena, the London Stock Exchange's increasingly popular AIM (Alternative Investment Market) may be the ticket, according to Scott Richardson Brown, associate partner at Oriel Securities.

The self-regulated AIM offers smaller companies access to institutional investors and hedge funds, Brown noted. A number of smaller E&P companies already have opted to take this route to funding and are currently listed on the AIM.

"AIM takes companies of most any size, usually $10 million or above," Brown said. "In fact I've seen companies as small as $2 million come to market."

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