?Remember when XTO tiptoed through the E&P tulips, picking billion-dollar bouquets? Remember when a dust cloud formed over northwestern Louisiana, kicked up by countless land-brokers chasing a dream called Haynesville?


Remember when big boys like Shell and BP and StatoilHydro plunked down billions to get a piece of North American shale plays, or when foreign nationals, such as KNOC and Itochu, sailed into the Gulf of Mexico for some action on the Shelf, or a slew of nimble private-equity-backed portfolio companies could flip a PUD faster than a pancake?


Seems like only yesteryear. Alas, where have all the dealmakers gone?


They are hunkered down as an economic hurricane ravages the landscape, a century storm unprecedented in the annals of recorded A&D. Since Lehman Brothers breached the levee last September that had been holding back a surge of financial-market fears, I’ve repeatedly heard, “This will get worse before it gets better.” Today, the mantra is unchanged.


So is there any hope of blue skies for oil and gas transaction engineers? It depends on which side of the eye wall you’re moored. Here is how I expect the A&D scenario to play out.


First, borrowing-base redeterminations will fling assets onto the market. With year-end reserve valuations crippled by collapsed commodity prices, E&Ps will see credit limits drop, and many will suddenly be noncompliant and needing cash. Unfortunately, lenders are still closed to new suitors.


Banks don’t want to own these assets and would rather implement a workout plan. But with federal SEC regulators hammered by Congress as being too lenient in the wake of bank collapses and Ponzi schemes, lenders will only bend so far to accommodate.


Overleveraged and cash-strapped producers’ only option will be to sell something fast. We’re already seeing this with Edge Petroleum and Delta Petroleum. This hurricane will whip up a lot of loose holdings.


Similarly, simple liquidity problems from cash flow that is now 75% lower than last summer are pinching some assets onto market. Exco Resources and Berry Petroleum are likely examples. Some, such as Hallwood Energy and Pacific Energy, have turned to bankruptcy courts to protect their assets from creditors.


Small independents with positions in shale plays will find severe capex cuts leaving large blocks of prime acreage exposed to lease expirations. This phenomenon will either result in hundreds of thousands of prime leasehold acres returned to mineral owners to sell again, or creative joint-venture deals in which the small-cap manages to partner with a well-capitalized and technologically superior big brother to beat the drill-it-or-lose-it deadline.


Others will be protected by shallow production, but without cash to drill the deeper, sweeter horizons. The JV will prevail, such as when Goodrich Petroleum farmed out its Haynesville position to Chesapeake. Better to have a small piece of pie than none at all.


Large-cap independents attempting to live within cash flow won’t be buffered from this reality, either. Having gobbled up vast swaths of acreage ahead of the unforeseen storm, many will be hard pressed to drill it on their own without access to the debt or equity markets. Noncore packages will come to market. Bigger JV offerings will let them retain core positions.


Depressed asset values will motivate some small and midsize public E&Ps with complementary assets to merge in no-cash, all-stock transactions to gain the advantage of a stronger balance sheet with more leverage in the financial markets. Cash-laden large independents will snatch up vulnerable companies or sizeable asset packages when they believe the valuations have reached the bargain basement.


Private-equity players will swoop in and save the day—eventually. At present, private-equity financiers are just as cautious as the rest of the market. About $30 billion is tucked safely away, by industry estimates, but that money is going to be timid and highly discretionary.


And then, with valuations at their lowest in a decade, a major or maybe a national oil company wanting more than a foothold in a prime play will buy a popular name or two—lock, stock and barrel. The prize will be too irresistible.


Will upstream A&D activity return to normal after the storm? Yes, but a new “normal,” with an appreciation that portfolios built on sunny days must be strong enough to weather hurricane forces.