Speaking to attendees at Oil and Gas Investor’s recent Energy Capital Week workshop, David Bole, managing director for Houston-based Quantum Energy Partners, revealed his not-so-secret formula for successful E&Ps.

The ingredients: a good management team, a competitive advantage in a specific basin, the liquidity to acquire undervalued assets, and the ability to reduce operating costs while optimizing operations.

“Clearly, we have been in a turbulent environment,” he said. “No question about it. The global financial crisis has resulted in a steep economic downturn that has impacted all of us in every aspect of our lives.”

The effect on energy prices has been severe, while capital is increasingly scarce and more expensive, he said. Yet, costs have not fully adjusted commensurate with the commodity-price pullback, leading to challenged economics for many drilling companies.

In fact, there is a “wall of debt maturity” coming in the next four years, and it is expected to boost assets sales from some 62 non-investment-grade energy companies that owe about $63 billion, said Bole. “Most companies have more acreage than they can reasonably expect to develop before the leases expire.”

Meanwhile, E&Ps that have liquidity for acquisitions are finding themselves in a “dysfunctional M&A market,” with a noticeable gap between buyers’ and sellers’ expectations. Many buyers are not interested in anything more than proved, developed and producing assets, he said.

“Out of this chaos comes opportunity. The key virtues are going to be patience and liquidity. I hate to use the cliché ‘to catch a falling knife’ because people lost fingers last fall, but this environment should favor those with acquire-and-exploit strategies.”

Bole expects to see more distressed asset sales, sales of noncore assets, joint ventures and partnerships between operators, and creative deal structures. Private-equity firms “reloaded” in 2007 and 2008, and, despite a lackluster performance in late 2008 and early 2009, are now open for business.

Private-equity providers want to see top-flight management teams who are returning to the fundamentals of cost-effectively growing production and reserves, buying right and cutting costs, he said.

Also, private-equity firms will hold their investments for longer periods before exiting. “We expect no more of the one- to three-year flips. There will be more three- to five-year hold periods. Overall, 2009 and 2010 could see the best buyers’ market in a decade.”

—Jeannie Stell