Acquisitions and divestitures in store for E&Ps, but likely not anytime soon

— "Cash is king" -- that's the new industry buzzword that began to circulate ad nauseum as credit markets seemingly vanished before our eyes last month, although the ghostly transformation had been brewing for some time as US lenders struggled to stay afloat in a sea of bad mortgages.

At Platts' Acquisition and Divestiture conference in Houston earlier this week, the cash/king mantra was driven home by panelists from upstream companies, Wall Street and financial services sectors, all of whom agreed that a lot of upstream properties are likely to change hands in the coming months, although things may need to get worse economically -- or at least linger awhile at present levels of uncertainty -- before that occurs. Lower commodity prices are really the key to what will motivate sales, experts say. If oil prices stay at $50 to $60/barrel for six months or so, deals are likely to start flowing. As one panelist said: "As oil comes back above $60, a lot of issues start resolving themselves because that drives up cash flow." Deals have fallen off in the mere handful of months since oil prices plummeted from the hallmark $147/b in July, but those who make their livings by brokering E&P deals insist there is a lot of back-burner simmering now as potential buyers and sellers both are gauging the market on just how long the current environment could last and what their options are if it persists. One other reason deals may not be forthcoming just yet, according to experts, is that buyers and sellers just can't get together on price. The market for properties has been a very hot market in the last few years, and that mentality dies hard. But while sellers have July 2008 commodity price strips in mind to value their properties, buyers are thinking more in terms of current prices. As one panelist said: "There's a wide gap between buyers and sellers right now." But deals should start flowing in 2009, primarily because if the current environment persists, there will be companies that cannot get financing of any kind and have liquidity issues that will force sales. Primary buyers will be those with cash, who want to expand their footprints in areas where they have existing operations or production. Primary sellers will obviously be those needing cash, and many of these may be privately-held companies. Even some large publicly-traded independents could be the target of takeovers by majors, some experts believe. Those same experts also believe that corporate mergers, which have fallen out of vogue in recent years, may start to make a comeback. In the end, it all appears to be a confidence game. The same $50-$60/b oil level that once kicked up a frenzy of drilling and made oil companies feel like kings with loads of cash on their balance sheets, is now worrying them and causing pullbacks in projected spending and keeping everyone in the industry busy looking for evidence of whether a gloomy forward outlook is justified. Meanwhile, service companies continue to insist they are not seeing widespread decreases in drilling activity. All the same, it's a good bet that right now they would rather see cash in their pockets than a crown on their heads.