"The capital formation process is impaired," says Thomas A. Petrie, president of energy investment-banking firm Petrie Parkman & Co., citing a crisis of confidence in markets generally and skepticism in oil and gas in particular. "The fallout of the crisis in confidence is that U.S. capital markets are seriously flirting with morphing into dysfunction. Congress has failed to adequately fund the SEC and Congress has failed to act. It is a sad commentary when New York Attorney General Elliott Spitzer has trumped what the feds should be doing." Speaking at the Independent Petroleum Association of America's annual meeting recently, Petrie said public debt and equity for energy are in a relatively poor state because the market is not embracing the current 12-month commodity-price outlook. The challenge in bringing new issues out is to overcome that skepticism. There is a wide gap in the perception of value between the oil industry and the market, Petrie said. The average multiple accorded exploration and production companies from 1993 to 1997 was 9.9 times cash flow, whereas the average from 1998 to today has been 5.8, he said. "Some 90% of the institutional clients we deal with believe the next major 'investable' move is a downward move in commodity prices," Petrie said, "but I am not convinced this is true. An oil price somewhere in the mid-$20s is supportable, and above $24 or $25 is basically an 'insecurity premium.' If you look at it historically, oil has been between $18 and $22 per barrel more days than not since 1989, so this center of gravity is what investors see." Because global, and U.S. oil inventories are lower than they have been in several years, Petrie thinks OPEC is not overproducing, but is meeting true demand. "Therefore, the oil-price decline investors fear is already half over-oil has fallen from $30 per barrel to $26 or $27 in recent weeks." In capital formation, there is extreme sensitivity today to issues of corporate governance, accounting data and management compensation. There is also disagreement over interpretation of old and new laws and regulations in a time of rapid change. Too, recent stock and debt issues have not performed in a way portfolio managers would find compelling, he said. And, the energy-merchant meltdown has affected hedging. The window is not totally closed for oil and gas issuance but the bar has been raised and the cost is prohibitive, Petrie said, citing the decline in market capitalization for many companies. In the near term, private equity and bank debt are viable ways to raise capital.