Not an hypothesis at all Nate. It's a fact that has been beaten into the staff of every public oil for at least the last 15 years. And it has been due, in part, to the industry recognition of PO. We've never called it PO...it has always been the reserve replacement issue. Since at least the early 90's most established companies have acknowledged, at least internally, that they would have great difficulty in the future replacing reserves via the drill bit. I spent much of my efforts during the 90's working production acquisitions. Very quickly a company's valuation was based upon y-o-y growth almost to the exclusion of profitability. I assisted in the acquisition of many fields which were bought at or close to their net value. It often mattered little if the property eventually yielded a positive rate of return or not. Y-o-y growth was the sole motive. In an odd way, financing of acquisitions during this time took on an aroma similar to the sub prime mortgage fiasco we’ve just witnessed. It was even worse at times: one client acquired another public oil I valued at $16 million for a total cost of $43 million (cash, stock and debt). The client was a micro-cap and needed the acquisition (any acquisition) in order to supply its market maker with sizzle to sell the public. The effort worked so well that the company became a target of a successful hostile take over by a very well know Wall Street raider. It was like watching two men fight over the right to captain the Titanic. Within 2 years the aggressor lost his butt as the true value of the acquisition became obvious. Such efforts played no small part in my personal decision to slide from such work towards the operations side of the business. Sort of like the old joke about how watching sausage being made can cause you to loose your appetite for it.

This growth at the cost of profitability has continued up to and including the price spike last summer. Chesapeake, Petrohawk, et al did major acquisitions at premium prices (thanks to the ultimate bullish oil market). Now those companies are struggling to maintain viability. They did achieve the primary goal: increase booked asset VOLUMES. Booked asset VALUE has, of course, tanked. But companies are generally given a free pass to some degree since they cannot control pricing. An interesting change to valuation is about to take place though. I don’t have the details at hand, but I’ve seen reports re: changes in SEC rules. Normally oil/NG is valued based upon the closing price on 31 Dec of each year. Not a pretty number last year. But now companies will be required to use a yearly average number (calculation method unknown by me). Even more significant for the unconventional NG players: proved reserves can now be booked based upon “analogous wells” as opposed to standard volumetric analysis. Unconventional NG reservoirs cannot really be analyzed with such standard approaches. That’s one reason they are called “unconventional’. It’s virtually impossible to calculate the inplace reserves because they are invisible to our standard tools. But once such a well has established its production decline it’s rather simple to project its ultimate recovery. But now an operator can take proven success from offset wells and apply them to an undrilled location. Depending upon the distance reach of such analysis the UNG players could see a huge increase in “proven” NG volumes. If these new rules are effective for 2009, though many operators may see a significant decline in drilling activity combined with the continued hyperbolic decline of existing production, they may actually show significant increases in y-o-y proven volume increases. And that still is, as far as I can tell, the primary goal of virtually all public companies.

since the late 1990s. In the 1970s and 1980s companies would go out and do their best on their leases, properties, reserves, etc.

Which is what ROCKMAN is suggesting his company returns to:

Though we have a good credit line the plan is to drill from cash flow only.

Ultimately, that leads to public companies going private, doesn't it? It implies a change of scale and a change of management prioritites and practices that doesn't fit the current 'stock market'. Patient capital. The institutional investors are going to have to start looking at performance of companies, not the performance of stocks.

It fits into what I've been thinking about "pay it forward". A move to cash flow and savings to finance investment. We alive now pay for investments, not generations to come. I wonder if eliminating long term credit and debt might not be an important part of getting to sustainability.

cfm in Gray, ME