But don’t breathe easy just yet, portends Tim Murray, managing partner with Guggenheim Partners.

“The fall borrowing-base redetermination will be worse than the spring,” he told a group at ADAM Houston. “I can be upbeat and lie to you or tell you the truth.”

For those who believe the spring redetermination season was gentle, he points to 20 E&P bankruptcies that resulted. “If that’s not bad, what’s your definition of bad?” he asks.

Yet the spring season could have been worse, he said, if not for the fact that much of the distress was mitigated by attractive hedging. “When the hedges start to roll off and you can’t replace them, that’s when it’s going to get tough,” he warned. More companies will be forced to sell assets, to restructure or be thrown into bankruptcy.

He said he is working with two clients currently with borrowing-base redeterminations still pending, but “we already know what the numbers are. Just run your bank price decks. You’re going to see good management teams with good assets have a day of reckoning. It’s coming.”

For its part, he said Guggenheim hedged its portfolio for two years in 2008 and is looking for a commodity-price spike to hedge again.

“The die is cast for 2010,” he says. The co-president and head of research for Tudor, Pickering, Holt & Co. bases the target price on the freefall of supply. “By the middle of next year, given how steeply rig count is falling and given base decline rates of about 25% for total production, we’re going to be down about 7 Bcf per day. It doesn’t matter if the winter is cold or hot, or if a hurricane affects things—things are going to tighten up and the market is going to get better.”

For A&D, he says, 2010 is going to be a year in which companies breathe a sigh of relief. “If gas is going to be $7.50, that will feel a whole lot better than today. Folks that have been holding on hoping things will get better are going to get a respite.”

So the likelihood of forced selling in 2010 will diminish, although “we still have to get through 2009.” He expects many companies, particularly private-equity backed, that have been on the sidelines will try to catch the rebound as prices trend up.

But wait. The smiley face comes off in 2011, which is the Return-To-Reality year per Pickering. With the ability to add supply fairly easily and quickly, and with shale-gas basins producing more with fewer wells, the feel-good run-up to $7.50 will deflate a bit as supply fills the gaps. “I’m using a number that has a 6 on it,” he states. Likely: $6.50 for 2011.

The wake-up call is going to be for the “have nots,” he says, those companies operating in high-cost basins. “What if you need $7.50 gas to make money?” he questions.

And how do these have-not operators survive? “You look at those places where you can operate cheaper and you buy your way into them.  We call it consolidation via necessity–folks are going to wind up in different spots.”

Check your F&D costs now.

KeyBanc Capital Markets analyst Jack Aydin says Carrizo is focusing its leasing efforts in Susquehanna and Bradford counties in northern Pennsylvania, with current holdings at some 30,000 acres there with 20,000 more in negotiation.

Says Aydin, “Our impression is that the company has been paying $2,000 to $3,000 per acre for five-year leases with additional five-year options and royalties of 15-18%.”

Carrizo also holds 112,000 acres in West Virginia and 70,000 acres in Centre, Clinton and Clearfield counties in central PA, with a total of 103,000 acres prospective for Marcellus net to Carrizo discounting its 50% partnerships with Avista.  And lease expirations are not an issue. “We have almost nothing expiring this year,” says Carrizo president and CEO Chip Johnson.

Additionally, to advance lease acquisitions in both the Marcellus and Barnett, Carrizo is seeking to form a land bank in which investors would pool $25 million or more, providing Carrizo with an option to buy the leases for a 120% premium after a period, with investors retaining an override.

Aydin surmises, “Carrizo’s management believes the prevailing economic, credit market and commodity price environment have made it possible to buy premium acreage and, in certain instances, PUDs at depressed prices.” Additionally, Carrizo may advance this goal with asset sales involving a Barnett midstream gathering system and its U.K. North Sea assets.

BMO Capital Markets analyst Dan McSpirit says Carrizo’s increased exposure to the Marcellus could be a catalyst for growth. “We believe Carrizo is one micro-cap stock among select few positioned to come out the other end of this asset value deflationary period as stonger, and potentially bigger, company.”

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

While it’s no consolation to those currently fighting getting dismantled in the bankruptcy courts, (ie. Crusader Energy, Energy Partners) like the Swine Flu, the Redetermination Pandemic resulted in few fatalities in spite of the hysteria and few assets offered. Why is this?

The simple answer is that banks, also under assault in the current economic battle, have no place and no desire to warehouse all of those E&P assets. Like with the single-family housing foreclosure crisis, banks don’t want all these assets coming back on the books and tying up their lending ratios.

Keep in mind that when the banks take back these assets, they don’t have a buyers market for selling them. After all, buyers are having a hard time getting capital for acquisitions due to tight lending practices by—banks.

Better to work it out with an otherwise healthy E&P currently making payments than to repo their assets.

And as these E&Ps jump this hurdle, they are quick to shout their financial stability in celebration. Some recent examples of these include:

• Carrizo Oil & Gas received a $40 million increase to $290 million.

• Stone Energy’s base was approved at $425 million, exactly the amount owed.

• Rex Energy was reaffirmed at $80 million with $5 million outstanding.

• Encore Acquisition’s base was lowered from $1.1 billion to $900 million, essentially the same following a $190 monetization  of commodity derivatives.

• Whiting Petroleum’s base was increased from $900 million to $1.1 billion with $610 million drawn.

• Contango Oil & Gas holds steady at $50 million with no debt outstanding.

• SandRidge Energy was reaffirmed at $1.095 billion while basis points were raised by 75 to 100 and commitment fees to a flat 50 basis.

• EV Energy Partners was revised to $465 million with $440 million outstanding and $26 million cash on hand.

• BreitBurn Energy dropped from $900 million to $760 million, still above its $717 million borrowings but enough to put it on a distributions diet to pay down debt.

• Approach Resources was reaffirmed at $100 million with amendments to terms set higher.

• Concho Resources was reset from $1.2 billion to $960 million with terms increased.

• Rosetta Resources was restated from $400 million to $375 million.

So breath a sigh of relief. The reaper has come and gone. At least until October, when we do this all over again, and sustained low commodity prices combined with hedges rolling off late in 2009 could start the pandemic frenzy all over again.

(For an analysis on bank-borrowing redeterminations by Tudor, Pickering, Holt & Co. Securities, click here.)

Auction activity is up and metrics are rising.

* At OGC’s last auction in March, twice as many bidders were registered as before the crash.

* Pre-crash royalty interests sold at OGC auctions for $101,196 barrels of oil equivalent per day; since July, they’ve avereaged $122,809 barrels equivalent per day—an increase of 18% during a period when oil and gas prices fell 67%.

Negotiated transactions are also drawing a lot of renewed interest.

* Before July, OGC saw about 25 data requests per sale. Since late 2008, they are averaging 100-plus—a 400% increase.

* Pre-July, they averaged five to eight formal offers per package. Since August, Clearinghouse has received as many as two dozen.

* Pre-emptive offers have always been common, but rarely big enough to induce clients to interrupt the sales process. In 2009 they’ve seen one offer that was aggressive enough to persuade the client to accept the deal without ever bringing it to market.

“We’re seeing record numbers of buyers looking at our sales packages right now—both auction and negotiated,” says Clearinghouse’s Geoff Roberts. “The more I talk to people, the more I find that this information is startling and exciting to them. They seem starved for good, positive news.”

Now, they’re here.

Many E&Ps with high balances are in for a fiery ride, and some simply won’t survive it with anemic cash flows and no where else to turn for liquidity.

Delta Petroleum finds itself in such a battle. Year-end 2008 the Rockies explorer was fully drawn on its $295-million facility with $65 million in the bank. Following a February redetermination, it found itself $140 million in arrears and has until June 15 to come up with the funds. The company says it will pursue joint ventures and asset monetizations, but the outlook is slim chances at best.

Delta is not alone. Others facing redetermination firestorms include:

• Edge Petroleum—Knocked to its feet following the busted merger with Chaparral Energy, the company reports it is on the brink of bankruptcy following a redetermination of its credit facility, resulting in a $114-million deficiency. It hired Akin Gump to find strategic alternatives for its mostly South Texas assets. May 15 is its drop-dead date.

• Crusader Energy—The newly public Oklahoma City producer came up a mere $5 million short following a review, but $5 million is a lot of greenbacks if you don’t have them. The company with assets in the Midcontinent and Bakken play hired Jefferies & Co. to seek strategic alternatives.

• Energy Partners Ltd.—Borrowing base plunged from $150 million to $45 million, leaving a $38 million deficit. It hired Parkman Whaling as financial advisor. CEO Richard Bachmann resigned. Its assets are onshore Louisiana and Gulf of Mexico.

Others, like Gasco Energy, are foreseeing bad news ahead and getting a head start before their review by trying to raise cash through the sale of assets. Meridian Resources is considering the same.

Guggenheim Partners managing director Tim Murray says that in the current environment with bid/ask spreads still far apart and credit largely unavailable, “unless you have equity or are swapping paper for the assets, it’s going to be very difficult to generate the proceeds to pay down your borrowing base.”

If you’re leveraged to the hilt—or maybe just half way—hang onto your hat. A hot wind is headed your way. And assets will fly like the firestorm it is fueling.

Have advertising revenues sunk so low as to need to entice additional eyeballs to the storied business pages? Have all the Wall St. bankers canceled their subscriptions now that their salaries have evaporated to a mere $500,000 a year? Does TARP forbid advertising? Do elite WSJ advertisers even care about the average sports-loving Joe Schmoe and his little earnings demographic? Does Rupert Murdoch just want to get his morning dose of Yanks regardless of which of his dailies he picks up at breakfast?

Considering that A&D Watch newsletter diligently and comprehensively covers oil and gas dealmaking, and all of the business-development folk are on vacation these days, we’ve decided to add a section titled “E&P A&D Sports” to the venerable blue newsletter.

While all the A&D dealmakers are taking a BD rainout amidst economic storms, we’ll put together a softball league, golf circuit and tennis matches and cover the results in the publication. At the A-Dcenter.com website, we’ll post up-to-the minute stats and online interviews with all of your favorite A&D stars.

“XTO Stallions look to match win-loss record to buy-sell record.”

“Asian shelf players sweep private independents in GOM Invitational.”

“Petrohawk birdies to clinch Haynesville Classic, losses ball in 12,400-foot-deep hole.”

“Rockies matchup between Oxy, Bill Barrett canceled due to ticket price differentials.”

“Chesapeake JVs with opponents to take 66-75% win in all tournament matches.”

It’ll be great reading and give the acquisitions teams something to do to relieve the boredom while the bankers get their act together. As banks are hoarding their cash from new dealmakers, maybe they’d like to sponsor some team jerseys instead.

Slow times call for drastic measures. If The Wall Street Journal can do it, we can do it better. And who knows? Maybe a deal will get done somewhere around second base and we can report on it.

Would they do it?

According to Calyon Securities analyst Jeb Armstrong, not likely. “We believe that PXP would only exercise the option in a doomsday scenario, namely if it were facing a liquidity issue and would not be able to cover its entire $1.65 billion obligation to Chesapeake. The economics of the Haynesville Shale are among the best of any onshore play in the U.S. It is extremely unlikely that PXP would choose to exercise the option in order to redeploy capital to a more prospective area or to another JV in the Haynesville with more attractive terms.”

Plains has already paid Chesapeake $1.65 billion up front in cash, with an agreement to fund half of Chesapeake’s 80% share of costs going forward until an additional $1.65 billion is paid. The option to beg out of 55,000 acres values the acreage at $14,400, or roughly half of the $30,000 it paid when it entered the JV, says Armstrong.

Why would Chesapeake give them an out once the deal was inked? Consider that Chesapeake CEO Aubrey McClendon and Plains CEO Jim Flores are friends going way back, and friends take care of friends. The out is simply a safety valve for the aforementioned “doomsday” just in case.

Would Chesapeake care if they did opt out? Again, not likely. The break-up deal involves no cash paid and only funds promised. Chesapeake already has its up front and is still getting it’s huge carry through mid 2010. Natural gas prices will probably rebound enough in that period to create enough cash flow to lessen the lost carry.

And Chesapeake will just do it again. I wouldn’t bet against them packaging up those 55,000 acres from Plains, throwing in a few more from their ongoing lease program, and JV a prime piece of the Haynesville to another eager player with cash. It could happen.

“It’s a very slow marketplace right now. A number of companies are looking at company acquisitions and merger potential because of relative valuations and a scarcity of quality properties on the market.”

Bilger says Tristone was anticipating the most active A&D market ever for the fourth quarter as 2008 blazed along at a record-setting pace through the first three quarters of the year, with Tristone closing on transactions in the U.S. totaling more than $7 billion through the first nine months. But that all changed when the credit markets went into turmoil in September.

“When the cost of capital increased and capital availability evaporated, the markets just shut down,” he says. Tristone capped its year on Sept. 30 with an $873-million cost-adjusted deal for Cordillera Energy Partners, which sold Buffalo Wallow and East Texas/northern Louisiana assets to Forest Oil Corp. That deal is the last significant A&D transaction that has closed, other than Statoil’s joint venture with Chesapeake in the Marcellus.

In addition to a lack of capital availability for doing deals, he says the precipitous fall in commodity prices since the summer has left an enormous overhang of failed property sales. He estimates transactions valued at more than $8 billion either failed or were pulled from the market in fourth-quarter 2008.

“Companies could either continue their offerings with a major gap between seller expectations and what buyers were willing to spend, or they could just pull the property.”

That disconnect has left a fallout of frustrated sellers, some that had anticipated selling to take advantage of high commodity prices or  beat an anticipated increase in capital gains rates, and those that need to sell to fund capital expenditures.

Bilger sees the asset drought lasting at least through the first quarter and possibly longer.

“It’s all about capital right now-the lack of capital availability or the high cost of capital. We’re seeing some debt offerings get done now, which is encouraging. A couple of companies have recently been able to raise substantial public debt.”

Devon Energy Corp. raised $1.2 billion in notes at 6% in January and El Paso Corp. raised $500 million at 15% in December.

Debt markets “have opened up a bit from where we were just a couple of months ago,” says Bilger, “but it’s still a relatively high cost of capital. Banks are still reluctant to get aggressive with their lending for property acquisitions.”

January brought renewed activity from potential sellers at Tristone. “These are companies that feel compelled to sell to fund either high-return capital projects that they wouldn’t be able to otherwise or make debt repayments. These asset packages likely won’t be available until the second quarter.”

Companies will also soon face added pressure from banks as borrowing base redeterminations based on year-end reserves and price forecasts squeeze cash availability, but Bilger believes the fallout will be limited. “We’re not going to have significant forced sales, but I do think there will be pressure from the banks to reduce debt and cut expenditures.”

So will borrowing base redeterminations throw a flood of assets into the marketplace as cash-strapped companies look to raise additional funds?

“There’s a mixed view on that. I’ve been told by a lot of people in the industry that we’re going to be swamped this year with property divestitures, but we haven’t seen it yet.”

Those that do sell will first look to divest their conventional assets to focus their financial resources in the new resource shale plays. “Companies are going to clean up their portfolios first by selling their non-strategic traditional assets and prioritize expenditures on  their new resource plays because of higher rate of return drilling and the need to hold the leases.”

Bilger notes a polar shift occurring in buyers and sellers.

“The private companies—especially the private equity-backed companies—were the big sellers the past couple of years. Buyers have been the more aggressive mid-size and large independents. Now those roles are reversing. The highly leveraged independents are going to be sellers going forward, and companies with access to private equity and some debt capacity are going to be the  likely buyers.”

He says Tristone is talking with private companies looking opportunistically at the marketplace and with well-funded independents and majors that have strong balance sheets. “There are definitely buyers out there looking for attractive strategic transactions.  However, they want to be careful that they don’t act too soon and that they wait for the right opportunity.”

This environment could encourage companies to seriously consider mergers.  With corporate valuations at their lowest levels in years, companies in strong financial positions see opportunities to buy companies to acquire attractive assets at a reasonable cost.

“They see synergies available by combining organizations and cost structures. It may be that the target company is over levered and doesn’t have enough cash to exploit its assets, and the acquiring company with a stronger balance sheet can do so. There are certainly people looking at potential M&A transactions.”

What will 2009 hold for the A&D market? “It’s a bit early to tell,” he says. “It depends on how prices react and particularly how credit markets respond. If prices rebound and stabilize and the credit markets continue to improve, then the second half of 2009 could be quite active for A&D.”

Kaiser’s private-equity fund Argonaut Private Equity, with more than $3.5 billion under management, first bought South Texas production from Chesapeake in a volumetric production payment for $412 million. It followed with a $50-million private transaction with SandRidge CEO Tom Ward for some of his personal stock in SandRidge.

The Wall Street Journal reporter Ben Casselman spoke to Argonaut managing director Steve Mitchell, who said, “Mr. Kaiser believes many energy stocks are trading at prices about as low as they’re going to get. The anchor is dragging bottom; he feels there are some good buying opportunities.”

Carl Tricoli with private-equity firm Denham Capital, as quoted by The Wall Street Journal, says, “Seeing someone like George Kaiser involved would reinforce the notion that this is the time to be looking at opportunities.”

The Chesapeake deal, which closed on Dec. 31, helped CEO Aubrey McClendon live up to his promise to investors to get the deal done by year end, although a few dollars short of his targeted $450 million. During the heady days of the commodity price run-up, Chesapeake spent money like a drunken sailor, according to JPMorgan analyst Joe Allman, but during 2008 was able to raise some $12 billion in asset sales and credit lines to pull out of the nose dive to avert catastrophe.

A few days following, Kaiser, also the chairman of private Kaiser-Francis Oil, bought a 5% stake in SandRidge representing a 23% chunk from Ward’s personal stock, who had to sell for “debt service and tax-planning needs.” Of note, in October Ward also sold his personal working interests in SandRidge-operated wells back to SandRidge for $60 million. Ward, too, was a co-founder of Chesapeake with McClendon in 1989.

Tudor, Pickering, Holt & Co. analysts like the combo, calling it a “vote of confidence” that Chesapeake and SandRidge assets are “pretty solid.” Kaiser is “a well-regarded energy money maker” and historically has “knocked the ball out of the park in both commodities and E&P business. We’ve got a savvy local buyer stepping up.”

The end of the downturn is near, if you believe a half a billion dollar swing by an experienced slugger.  Maybe his move will be a catalyst to get money flowing back into the upstream energy sector void.

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