Crude's plunge chills mood at deal-making event

Tumbling crude prices lent a somber mood Thursday as oil patch players gathered in Houston to buy and sell land.

At the two-day North American Prospect Expo at the George R. Brown Convention Center, drillers and oil field financiers had to wrestle with the possibility that crude could remain cheap for a long time and that their oil fields in Texas and elsewhere probably won't fetch nearly as much as they would have a year ago.

Many of them have been wounded deeply by the oil market crash that began last year. Over the next few months, financial pressure is expected to force more oil property to the auction block, but deal-makers were in limbo this week as U.S. crude continued its long jaunt down to near $40 a barrel.

"Everyone's holding their breath and waiting to see what's going to happen," said Shad Frazier, an executive at oil driller Legacy Reserves in Midland. "People are nervous about how long this will last. The last six months have gotten really quiet."

Oil giants like Royal Dutch Shell and large U.S. crude producers like Noble Energy Corp., which in recent years have drawn crowds to swanky booths, were noticeably absent from the event. Small and midsize companies huddled into prime real estate on the showroom floor.

Attendance came in around 600 lower than the 5,000 that conference organizers had anticipated, and while that's a good showing during a downturn, there were other signals that the industry was biding its time.

Even the aisles appeared wider than in previous years, with fewer booths and brightly colored maps of drilling sites.

Losing jobs

The event, one of the industry's largest conferences, felt smaller than usual, participants said, and while wildcatters and financiers shopped around at a brisk pace, the business of closing deals was slow going. Geologists said they'll probably see more of their colleagues lose their jobs in coming months; oil executives said bankruptcy lawyers will probably be busier.

No one was on a buying spree. Many were holding oil acreage they couldn't afford to drill and develop at current crude prices, so they prowled the aisles looking for others that could. Some agreed to off-load acreage at deep discounts. Laid-off workers trolled the aisles hoping to rub shoulders with potential employers or recruiters who could connect them with job openings.

'Kind of depressing'

"It's kind of depressing right now," said Mark Hollier, a geological adviser at Houston's Cabot Oil & Gas Corp. "There are a lot of shale players that are really hurting, especially smaller companies that have borrowed money. It's going to be rough waters over the next year or so, and there will be a lot of change."

At a bare-bones booth adorned only with two large black-and-white maps tacked to the wall, Harvest Petroleum was hawking a 3 percent interest in proven undeveloped reserve in an oil-rich region of West Texas.

The same asset could have sold at a profit last year. This year? Bob Harvey, CEO of the North Texas company, said he and his partners are offloading the interest at cost.

But sellers say the recent slump has changed the way drillers approach the American oil field: It has brought more conventional vertically drilled assets back into vogue. They're the kinds of oil wells the industry has drilled for a century, but that lost their luster in the last decade with the advent of technologically advanced shale wells in Texas and North Dakota.

That shale oil boom helped end about three years of $100 oil last summer, with the nation's oil production reaching its highest point in decades. But shale wells give up most of their oil production in the first year - unattractive to drillers getting $40 a barrel for their oil.

That's why conventional basins in East and South Texas, Kansas, and southern Louisiana and many other states have drawn a lot of attention at this summer's expo. They cost two-thirds less than a more complex horizontal well and they can reach more oil, but over a longer span of time, which makes drillers hopeful these wells will still be pumping oil by the time crude prices recover.

Many of the exhibitors at NAPE were marketing conventional plays in Texas and along the Gulf Coast.

'Not as sexy'

"It's not as sexy," as shale, said Phillip Blower, a land manager at Whitmar Exploration Co. in Denver. "But you drill it and your costs were low, and in the end it's probably higher upside and it makes more sense when oil is $40 a barrel. You look around the room right now, a majority are conventional plays."

More wildcatters are looking to bring the advances from shale plays to squeeze more oil from the sandstone fields that have been drilled for decades, said Jerry Eumont, managing director of upstream research for IHS. But land costs have risen because of shale investments, and the land prices haven't come down much because of the oil slump, he said.

Sellers also were pushing assets that have been developed - already drilled and completed in some cases, and waiting for production to begin - or situated in established regions where operators have proved they can squeeze oil and gas from the ground, including the Permian Basin and the Gulf Coast, said Jeanine Piskurich, NAPE operator committee chair.

"So not the big resource plays that (require) significant dollars and significant investment," she said. "But more using know-how to be able to go into existing fields, into these core basins and core areas."

But the next few months are expected to bring more pressure on oil companies that have collected high levels of debt in recent years. This fall, banks will begin a semiannual period in which they reassess how much companies should be allowed to borrow.

That could produce an influx of oil and gas deals this year, said Stuart Rexrode, CEO of financial firm Blue-Rock Energy Partners.

"We're going to see a lot more activity in the second half of the year because sellers are becoming a little bit more realistic about the value of their assets," he said. "You've got some companies in pretty dire straits heading into this fall."