By LOUISE S. DURHAM
EXPLORER Correspondent

'It's a Strange World We Live in Now'

If Cash Won't Flow, Neither Will Oil

A Tale of Two Regions

1. Languishing in Louisiana

2. A Rocky Mountain High

Many oil industry analysts who early on had dismissed the September OPEC confab as a do-nothing, ho-hum event were caught red-faced when the cartel opted to decrease production, triggering reports of outrage on the part of some of the prognosticators.

But these aren't the folks who spend their days "betting the farm" on hitting the next discovery. Those who do might be more inclined to view OPEC's apparent determination to maintain crude oil prices near their current level as a much-needed Rx to invigorate the anemic drilling arena.

"Industry lacks confidence in prices," said longtime prospect generator and geologist Frank Harrison, president of Lafayette, La.-based Optimistic Oil and a past AAPG president.

"If industry is secure with $26-$28 oil and $5 gas, I think we'll see a lot more drilling," he said. "We've been there before."

Despite the frustration over the lack of any dramatic upsurge in drilling activity in tandem with the healthy commodity prices that have prevailed for the last year or so, a lot of new faces are emerging in the form of small, new companies.

"I don't know exactly where all these companies are coming from," Harrison said. "I didn't recognize a lot of people at APPEX -- they're new. I think a lot of these people are going back and re-evaluating prospects they had along the way that didn't quite meet economic standards, and today they're viable.

"Society is so litigious you almost have to form a company now, so you see a lot of LLC companies springing up," Harrison noted. "I think one reason is for protection, given the environmental concerns and other types of pressures on the industry.

"I see a number of new LLCs in Louisiana, and I don't know who started them," he said. "They're out there prospecting, but a lot of them may not be able to survive."

A Big Brushstroke

There's a real demand for good prospects, according to Harrison. He emphasized, however, it's still difficult for independents to get prospects funded unless they have 3-D seismic data.

When you add the cost of 3-D on to the tab for sophisticated hardware and software needed for project development/evaluation and other costs incurred by prospect generators, prospecting can be a pricey undertaking, with no guarantee of recouping these costs.

"More and more of the guys in SIPES say no one wants to pay for prospects," said Robert Pledger, president of Benchmark Oil & Gas.

"You might put a $20-, $30- or even $50-thousand geological fee on a prospect, which is not unreasonable for maybe six months of work," he said, "and they give you a carried interest or a working interest with them. If it's unsuccessful or not drilled, you end up with nothing for your effort.

"It's hard to recover from all those ugly frogs you end up kissing along the way," Pledger noted.

Money -- or the lack thereof -- to fund drilling deals is an overriding concern these days.

"It's a strange world we live in now," said Ron Neal, president of privately-held Houston Exploration and Development, which has expanded its longtime offshore-only focus to include some onshore.

"Product prices are good, and services are modestly priced overall," he said, "but there's no new money pouring in from Wall Street or other places."

The capital may be available, but there's little inclination to sink it into oil and gas companies. Fear of a sudden price drop or skepticism about the ability to maintain growth in the case of a public company are not the only culprits to blame for this dearth of interest on the part of the financial community.

"We suffer from the public -- Wall Street and the like -- painting us all with a spray can, which covers a lot of area, because of Enron and others like Dynegy," Neal said. "We're still suffering for their sins.

"They were called an energy company, and I'm called an energy company," he said. "We're vastly different, yet we were all painted with that same brush. It was indiscriminate."

Show Me the Money

Today's stressful business climate can be more challenging for some than others, according to Neal.

"It's a killer to make money, especially as a public company," he noted. "It's a good private industry business, but if you're public and you can't grow regularly with sustainable growth, your stock can't go up even though you may be profitable."

In 2000 there were more than 400 public companies, as tracked by the Oil & Gas Journal, according to Scott Johnson, managing director Weisser, Johnson & Co., which serves as an agent to help arrange financing, primarily for smaller, private companies.

"In September 2003 there were only 154, and we're shrinking fast," Johnson said. "There have been no IPOs in the industry since early 2001.

"It's an interesting time in terms of the shift in how U.S. gas and oil development is going to be financed."

As far as financing sources, the public financial markets are not supportive of small companies in any industry, according to Johnson. However, the mature producing regions in the United States are most appropriately pursued by smaller companies.

"There is a job to be done," Johnson said, "but the question is where is the money going to come from? -- the answer is private capital, hopefully."

He outlined the major sources of private capital for the oil and gas industry:

• Banks: Fewer of these around today.
• Mezzanine and project financing: Nearly all went out of business following Enron debacle, but the market is starting to come back and should expand significantly from where it is today.
• Corporate equity (private company equity): Basically a large number of private equity dollars are available and we're likely to see more deals getting done here -- investors are choosy, and it's a matter of matching people with money.

"There's really an important push and pull between the need for capital and the supply," Johnson noted. "Private companies are the ones going to do a lot of the development, and they must get money from somewhere to develop reserves, especially natural gas, where demand is growing so fast.

"Usually, over time, when you have a crying need, that need gets filled at least to some degree."

Think for Yourself

Sometimes it helps to sit back and re-think where you're headed and maybe switch directions. Just as the seismic industry is focused in large part on creating a new business model, so too are some of the E&P folks.

"I'm very optimistic about our business," Pledger said. "But I think we must change the way we do business or get out -- we must re-group and find a better way."

This guy doesn't just talk the talk; he walks the walk.

To fill Benchmark's need for capital and free himself from chasing money so he could concentrate on exploring, Pledger opted to buck the trend toward shunning the public arena.

After going it solo since 1977, Benchmark went public in 2000 by merging with a Swedish company that raises capital, while Benchmark concentrates on bringing the technology to the table. The merged twosome doesn't go it alone, choosing to lay off a part of a project to a third party.

"The idea for us, as I look at where our industry is going, is we must find opportunities and produce more reserves on a per dollar expended basis from a risk viewpoint," Pledger said.

"The joint venture people we deal with are very sophisticated," he said, "and they want to see you risking your projects. They want to see all the application of the technology through
3-D, and they want the well control tied in and to know that you understand the regional picture and... economics.

"Then they go into the legal side," he continued, "like the leases, title and so on. All require this yet they don't want to pay for all that work."

Like so many in the industry, Pledger finds it hard to shake the lingering hangover from those vicious, unexpected price dips in the past. In setting next year's budget, he's not using prices above $27 oil and $3.50 gas.

Despite the scarcity of public equity and the money lenders' current disinterest in the industry in general, some companies are penetrating this barrier, perhaps indicating that things may be loosening up a bit.

For instance, Brigham Exploration recently raised $40 million in a public equity offering to accelerate its drilling program.

"We're a pure drilling story, capitalizing on the field discoveries we've made and also exploration drilling," said company president, CEO and chairman of the board, Bud Brigham. "The fact that we were successful in our offering hopefully is a good sign for the industry."

In this time of so-so rig activity, the company's aggressive drilling program might be viewed as a good sign as well.

As cash flow has grown, so has the drilling pace, which Brigham noted will accelerate further as a result of the offering. Fifty-three wells are on the schedule for this year compared to 35 in 2001. Formerly a pure exploration company, Brigham said 60 percent of drilling at CAPEX has been developmental for the last several years and will continue this way.

"This has been the best of both worlds for our company," Brigham said. "We expected service costs to come up more than they have, but there's been no pressure there, and gas prices are strong.

"Margins are unprecedented," he noted.