A&D Intelligence

If you need money to do a deal in today’s economic environment, it’s quite expensive or just darn impossible, says Dan Pickering, co-president of Tudor Pickering Holt & Co. Securities Inc. “Capital is going to be very tough to come by in today’s environment. The music has stopped when the markets are rationing capital and its hard to get money.”

Pickering made his comments at Societe Generals’s quarterly luncheon in Houston recently.

Specifically, the overall stock market hasn’t done an IPO since August—anybody, not just energy. No one has been able to do a debt-deal in the last four weeks unless they’re A-graded. Commercial paper is out there but very difficult. And private equity, wherefore art thou?

“There’s a ton of it and they’re ready to go to work,” says Pickering, “but probably not for three to six months. Prices are coming down; the market is coming their way. Private equity is going to step up, but not at today’s prices. We still have a bit of a mismatch between buyer and seller expectations.”

Cash is king when credit is scarce. “If you’ve got money you’re in the drivers seat. It’s definitely becoming a buyers’ market–but that implies somebody wants to buy.”

So where are the buyers, those cash-flush companies eager to pounce? “Most of the buyers are waiting because they feel they can get a better deal, which is freezing transactions. A lot of guys aren’t (buying now), but they’re ready.”

Pickering recounts speaking with a company recently that told him, “I haven’t seen a deal I’ve liked in two years, and I just saw one last week that I’ll think about doing—but not now.”

And while shale plays are still valuable, “they cost money in the near term and they don’t generate money in the near term. Everybody that owns acreage in the Haynesville, the Fayetteville, the Barnett and the Marcellus love it, except it doesn’t generate any cash.” He says no one wants to put any money into acquiring acreage at this moment in time, bringing down acreage and property prices just about everywhere.

That’s because everybody that was spending more capex than were generating free cash flow are now whacking at capex budgets with machetes. “You can’t just spend more than you’ve got. Everybody’s living within their means: It’s the new mantra with public E&P companies.”

(For a look at companies that are flush with cash and those that are gasping for cash, check out Pickering’s chart “The Music Has Stopped.”)

Ironically, he says, in today’s world buying reserves on the public market is cheaper than buying in the private market. Proved reserves are trading like oil is going to be $50 to $60 forever and gas is going to be sub-$6. No credit is being given in net asset values for the Haynesville, Fayetteville or any other shale play.

“That’s probably too extreme, but it’s where people are because no one wants to take a risk. We’re not going to hit bottom until commodity prices stabilize.”

In the meantime my-cheap-stock-for-your-cheap-stock deals may become apropos, he suggests.

And will the majors take advantage of fire-sale valuations to return to North America? “It feels like they ought to,” he says. “BP has been spending money a couple of billion at a time, and now there are companies that are worth a $2 billion that were worth $10 billion a couple of months ago.” He points to Chesapeake Energy, whose stock price rose 9% on the rumor that BP Plc would acquire it.

“This change has come about very quickly,” Pickering says. “Maybe it changes quickly again and gets better fast.”

Steve Toon, Editor, A&D Watch; The A&D Center, www.A-Dcenter.com; Contributing Editor, Oil and Gas Investor; www.OilandGasInvestor.com; stoon@hartenergy.com

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