?Ironies abounded at the 37th annual Howard Weil energy conference last week. The most common one was CEOs who vowed to live within their means—with greatly reduced drilling—yet who still promised production growth of at least 5% in 2009.
Attendance was as big as ever, although organizers had worried about the head count, given the weak state of the economy and equities in general. More than 480 buysiders and portfolio managers convened in New Orleans for the event.
But the crowd was a bit different. It has been evolving over the past few years. About one-third of attendees were newcomers, many young and new to the energy space, and others were value investors and generalists looking for ideas among the beaten-down energy stocks. About two-thirds of attendees were repeat customers.
“Investors who have not been ?here for a year or two came to see if this is really the bottom. If the bottom is already priced into the stocks, then this is the time to buy. If so, things will be good. If not, and people here say, ‘Wow, I didn’t know it was this bad,’ then we are in for trouble,” said one portfolio manager from Dallas. “We’ll see what they do in the next two or three days.”
That same day, the Dow Jones Industrials rose 497 points, taking all the energy stocks along for the ride.
At what point do the equity markets look through 2009 and essentially write it off, and instead focus on 2010?
“The conundrum is, companies that have created the most value and have the most growth going forward are in natural gas, which has the weakest fundamentals going forward,” noted Gregg Jacobson, managing partner of Caymus Capital Partners LP, a long-short hedge fund in The Woodlands, Texas.
“We feel certain about a few critical things,” said new Howard Weil president Paul Pursley, a 22-year veteran of the firm who took over the post in January. “First, we will emerge from this current malaise. Second, we have confidence that energy equities will outperform the market. But like you, we have questions. What will be the effect of greater LNG imports this year on gas prices? When do equities reach the trough? When do U.S. rig counts bottom?”
The rig count should bottom in April or May, several drilling contractors said. But some idled rigs are already going to auction, according to Richard Mason, editor of the Land Rig Newsletter, who was in attendance.
One after the other, executives from companies large and small emphasized financial discipline, cost management, balance sheet strength and other homilies about financial prudence.
“Being a cheapskate finally pays off,” joked Craig Clark, CEO of Forest Oil Corp. Another CEO, Charles Davidson of Noble Energy Inc., said that last year when he showed a slide on managing costs to improve margins, attendees yawned and turned the page, but in this year’s changed environment, they are very interested in such topics.
“The game has changed. We are in a recession,” said Andrew Gould, chairman and CEO of Schlumberger.
“Evolution in demand is now the driving factor in oil and gas prices. This, more than OPEC, governs what happens next. But let me be clear: if you do not invest, this situation [declining world oil production and little spare productive capacity] will only get worse. Oil supply is particularly vulnerable to reduced investment.
“The longer the decline [in rig activity], the steeper the commodity price recovery will be when it occurs.”
Meanwhile, Gould said that after hiring more than 20,000 people during the recent five-year boom, Schlumberger laid off 5% of its global workforce by the end of the first quarter, and will likely have to lay off another 5% this year. He did not give any details on timing or where the cuts would occur.
Oilfield service customers want costs to come down commensu?rate with the decline in commodity prices, but, said Gould, “the cost-adjustment process could take another 12 to 18 months. Trying to drive out the accumulated inflation in our own supply chain could take a year to work through the system.”
He also said he does not expect a recovery in U.S. land rig activity in second-half 2009.
Managing through the downturn seems to be easiest for E&Ps with a diversified portfolio, particularly if they have international exposure and are not overweighted to U.S. natural gas.
“Amazing things have happened in the past year but we are well-positioned. We passed up some high-cost opportunities and that seems to have been wise,” said Charles Davidson, chairman and CEO of Noble Energy Inc.
“For us diversity is critically important, and not just in geography, but in matching projects to our expertise, and across countries and markets.”
Noble, whose reserves are 41% international, just announced a 5-trillion-cubic-foot discovery offshore Israel. In the past two years the company has found 600 million barrels of oil equivalent, including in Israel and the deepwater Gulf of Mexico, “essentially all unbooked,” he said.
Growth was a strong theme throughout the conference, although several companies have cut their rig counts significantly. The CEOs of EOG Resources, Devon Energy and Anadarko Petroleum each said they are in no hurry, and will drill just enough to preserve leases and organizational skill sets.
“Devon’s rig count was 112 operated at the peak in October 2008. We are down to 32 now, and we’ll keep it flat there for the year,” said president John Richels. “We see no reason to accelerate our gas production in this market.”
He said Devon estimates a gas price of $5.40 is needed for the Barnett shale to generate a 20% after-tax return on investment.
“We’ll continue to grow, we’ll be up 10% to 15% in 2010,” said Aubrey McClendon, chairman and chief executive of Chesapeake Energy Inc.