8/13/2019 Industry Now Better Managed, But Waiting for Returns to Grow

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Industry now better managed, but waitingfor returns to grow12/01/2002

Recently, the oil and gas industry has entered a paradox natural gas went over $4/Mcf and oil companies did not increasedrilling. They may have by the time this is published, but don't skip over the impact too quickly. The oil business has recognizedthere are factors that can impact the industry, other than wide-eyed optimism low oil/gas prices. Growing up is hard to do.Investors have complained for years that the E&P industry is a "destroyer of capital" and that the industry has no respect forreturns. So the industry listened, planned, and adopted smart and successful business practices from other industries. Today, theoil and gas industry has more capital discipline and understanding of the value of returns than ever before. Unfortunately forsome, that means lower drilling levels, at least so far.Instead of begging, borrowing, and stealing any capital possible to ramp up drilling in a $4/Mcf-$30/bbl commodity priceenvironment, the industry's return-based planning and capital allocation restricts spending based on gut-feel or emotion.Seemingly over-night, but truly after years of investor beatings, the oil and gas industry is much more professionally managed.When the fear of a recession eases, US independents will ramp up drilling for gas in North America. The Gulf of Mexico shelfmay well have had its last big party. While a large number of very small reserve pockets remain, they are difficult to justify in ahigher-return market. Deep drilling will keep the lights on, but the wells are expensive and highly pressured. They carry a higher

risk and the emerging technology still needs time.The deepwater continues to be the "exploration" play de jour with large reserves, improving technology, and more interested

players. While development of discoveries proceeds at a pace slower than many would like, the continued success in drillingassures the deepwater of a long economic life.The US natural gas market is a maturing market. Everyone repeats that mantra, but many will find over the next year or two howvery true it is. Like small birds leaving the nest, the next push overseas is inevitable. The larger, and now smaller, E&Pcompanies have been moving to farther shores with the ebb and tide of the cycles. Today, more US independents are operating inlarge, sophisticated, high-production hydrocarbon regions than ever before. Soon, the business will go truly global.Oil and natural gas prices will be high enough so that demand is met and low enough to interest supply. Over time, LNG willmeet a great deal of marginal demand in North America and may surprise many with the speed and size of capital investments.

Natural gas prices will see LNG competition at the $2.75-$3.25/Mcf level, keeping a balance between indigenous and importedsupply.Oil prices are likely to decline with the fall of the Saddam Hussein regime in Iraq. Discipline by OPEC and gradually increasingdemand should keep prices above $20/bbl, which keeps most drilling economic. As the industry found out years ago, there is toomuch oil in the world at $40/bbl and not enough at $5/bbl. Reality will be somewhere in between.From current levels, Banc of America's outlook on the sector is positive. A number of evolutionary technologies continue to bedeveloped and applied, including steerable drilling assemblies, intelligent wells, coiled tubing, and expandable tubulars. Noearth-shattering digital or seismic technologies appear to be knocking down doors, but the value of the current technologycontinues to be more appreciated. It doesn't seem that any needed technology is more than a few years away.In the near-term, look to winter weather and a growing economy. Those are more trends than events, which makes theiridentification more difficult. But as time heals all wounds, eventual clarity of the market, the economy, and commodity priceswill align to let the industry get back to what it does and knows best drilling wells. But there is likely to be more cynicism inthis recovery than in the recent few.