?This spring, while the Dow kept falling and commodity prices struggled to hold above $4 and $40, drilling rigs were being laid down in play after play like dominoes. Year-end reserve write-downs wiped out value, at least on paper, for some E&Ps whose production had risen as much as 80% during the year.


Operators and investors seeking assurance may feel they are looking for a needle in a haystack. Chief executives and investor-relations people are tap dancing around the risks and the solutions.
A harbinger of things to come, the number of drilling permits in 30 producing states fell 24.8% in December and 26.2% in November, says Tom Driscoll, analyst with Barclays Capital Research in New York. They fell again in January.


Oklahoma is down 18% or 60 permits, and Utah is down 31% or 40 permits, leading the January decline. Other states—notably New York, up 70% or 42 permits, and New Mexico, up 18% or 26 permits—experienced an increase in permitting activity following the holiday slowdown.


“We believe the rig count will continue to fall sharply into the second quarter of 2009,” Driscoll says.


And, the season of borrowing-base redeterminations is well under way. That’s made for a change in the message from many E&Ps.


Last year, press releases focused on how many shale acres they had leased, and how many drilling locations were in inventory. This year, after some dramatic reserve write-downs and hedging losses reported at year-end, CEOs are intent on reassuring the investing public. Proving one’s financial stability is key. A close second is defending E&P strategy and justifying why certain spending decisions have been made.


Companies are using every tactic to cope with the downturn. Energy XXI Ltd. monetized some of its oil and gas hedges for net proceeds of $66.5 million, which were used to reduce borrowings under its secured, revolving credit facility. Concurrently, the firm re-hedged all of the related volumes for 2009.


Encore Acquisition Co.’s borrowing base of $1.1 billion was adjusted by $200 million solely as a result of monetizing its hedges. The revised borrowing base, $900 million, allows it the same amount of borrowing capacity after the redetermination as before.


As James Dearlove, president and chief executive of Penn Virginia Corp., says, “We understand the financial community’s concern regarding liquidity in general and in the E&P industry in particular and, therefore, believe this update regarding our revolving credit facility is appropriate.”


Even powerhouses like Chevron and ConocoPhillips found themselves on the defense. On March 10 at Chevron’s annual analyst meeting in New York, the company reported, “Chevron is well positioned to deal with difficult market conditions, given its strong balance sheet, numerous new growth projects and a disciplined approach to cost management.”


That same week ConocoPhillips CEO Jim Mulva said nearly the same thing, justifying its exploration program and growth outlook.


In the weeks ahead, we can expect more E&P companies to scramble in light of fears real and imagined, as bank redeterminations, slower activity and clogged capital markets unmask the weak and Congressional actions threaten even the strong.


Natural gas may yet be the long-term winner in this saga. Chairman and CEO Randall Stephenson says AT&T will deploy more than 15,000 alternative-fuel vehicles during the next 10 years, and spend an estimated $350 million of that during five years to purchase about 8,000 compressed-natural-gas (CNG) vehicles. This is the largest corporate commitment to CNG vehicles to date.


Meanwhile, T. Boone Pickens, also a natgas vehicle advocate, organized a “Virtual March on Washington, D.C., for Energy Independence” on April 1-3. He is calling on the “Pickens New Energy Army” and other Americans to bombard Congress with calls, e-mails, faxes and personal meetings to stress reforms that encourage energy conservation and efficiency, and make the nation cleaner and energy independent.


His corporate supporters include Owens Corning, American Electric Power (owner of the largest electricity-transmission system), the American Wind Energy Association, AutoNation (the world’s largest automotive retailer, selling nearly 450,000 vehicles a year), Genmar Holdings Inc, the world’s largest privately held recreational-boat manufacturer, and FLW Outdoors, the world’s largest tournament fishing organization, along with a dozen other organizations. We’re all in this together.

Capital markets will return to the E&P industry. Find balance-sheet best practices, sources of capital, new financing vehicles and more liqui­dity tools at Energy Capital Week in Houston this June 1-3. To view the agenda and register, go HartEnergyConferences.com. It is the must-attend event of the summer.