What can producers do with surplus cash? "It's a question we're asked by our clients all the time," says Michael Dickman, a managing director of Morgan Stanley in New York. "...If companies can reinvest their cash, that's what investors would like them to do." If not, companies must decide how to give the profits back to shareholders in the most efficient manner. Special dividends and stock repurchases are two means. "We do see a huge build-up of cash in the (E&P) business." What is too much? "It's excessive if you don't have anywhere to put it." Dickman was among panelists at the annual Cambridge Energy Research Associates conference in Houston recently. Stephen Hurley, president of privately held, Dallas-based Hunt Oil Co., said exploration has fallen out of favor among independent oil companies. "It's hard to find prospects that really impact some of the big companies today, plus investors are risk-averse and most companies aren't very good at exploration. There has been a tremendous amount of capital destruction." There are also technical obstacles, finding costs are up and the reserves producers are finding tend to be small. While there is no new technological breakthrough, "it's a very tough business," Hurley said. Successful companies need an emphasis on an exploration culture, creative people and a focus on the front-end of the E&P process. "Without these, it is unlikely that you will be successful," Hurley said. Aubrey McClendon, chairman and chief executive of publicly held, Oklahoma-based Chesapeake Energy Corp., thought himself an unlikely panelist on the topic of what producers should do with cash. To McClendon, the answer is simple: spend it. Spend it on exploration, exploitation and buying other companies' reserves and production. "Asking me what to do about cash is like asking a fraternity boy what to do about beer," he said. The options are drill more, acquire more, reduce debt, increase dividends and repurchase stock-or keep it. "The industry is likely to do some combination. There is not one that is the best (for all)." At Chesapeake, "our first choice is always to drill, if we have the prospects." In 2004, some companies began drilling more and that put pressure on finding and development costs. "Clearly, who is not drilling [onshore the U.S.] is the majors." Even just acquiring assets isn't that simple an answer. "You've got to be willing to drill. Most of the (asset) packages (for sale) today are 50% to 70% PUDs (proved undeveloped reserves)," he said. Using surplus cash to reduce debt is not an option to him, he added. "If I don't have ways to invest money and get a better-than-6% return, then I need to sell the company." He added that he isn't concerned about new North American gas-price pressure from liquefied natural gas (LNG) supply. "I'm not sure anybody with a load of gas would sell it in the U.S. at $4 when it could be going for $6." Also, the current North American gas-production decline rate is around 30% a year. "If we stop drilling, we would all be broke in a rapid time frame." Any depletion from the existing gas-supply base would overtake the impact of relatively small LNG imports, and prices would readjust upward. He believes oil prices will ultimately affect natural gas prices more. In 1998, a major study predicted coming U.S. natural gas demand of 30 trillion cubic feet per year and that prices would still be about $2 per thousand cubic feet, he noted. "We didn't believe it," he said. And, he still doesn't believe it. "Unless someone can convince me (I'm wrong), we'll stick to our plan of putting our excess cash into the ground."