Oil and Gas Industry Mergers will pick up end of 2009 - 2010

67 WALL STREET, New York - August 4, 2009 - The Wall Street Transcript has just published its Oil and Gas Exploration and Production Report offering a timely review of the sector to serious investors and industry executives. This 60 page feature contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. The full issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

Topics covered: Stock Winners and Losers - Volatility in Rig Rates - Oil Price Volatility - Stressed Balance Sheets - Catalysts for Stock Returns - Small Cap Picks - Oil Supply Economics - Natural Gas Price Cycle - Oil and Gas Service Industry Cost Structure - Productivity Rates - Operational Leverage

Companies include: ATP Oil & Gas (ATPG); Berry Petroleum (BRY); Evolution Petroleum (EPM); Denbury Resources (DNR); GeoResources (GEOI); Whiting Petroleum (WLL); Berry Petroleum (BRY); Range Resources (RRC); Petrohawk Energy (HK); Diamond Offshore (DO); Hercules Offshore (HERO); Rowan Companies (RDF); Noble (NE); Transocean (RIG); ENSCO (ESV); Pride Petroleum (PDE); EnCana (ECA); Tristar (TOG:TSX); Celtic (CLT:TSX); Breaker (WAV:TSX); Crew (CR:TSX); Pan Orient (POE:TSX.V); TransGlobe (TGL:TSX); Antrim (AEN:TSX); Ithaca (IAE:TSX.V); Sterling (SLG:TSX.V); Petroflow (PEF:TSX); Petrolifera (PDP:TSX).

In the following brief excerpt from just one of the thirteen detailed interviews in the 60 page report, 5 star rated industry expert and ranked Zacks Analyst Philip McPherson discusses the outlook for the sector and for investors.

Philip J. McPherson is a Senior Analyst in the Energy Group at Global Hunter Securities, LLC. He joined the company in June 2007 as a Senior Equity Research Analyst in the Energy Group. Prior to joining GHS, he was Director of Research at C. K. Cooper & Company, a boutique investment banking firm located in Irvine, California, which focused exclusively on small-cap exploration and production (E&P) companies. In his role at C. K. Cooper, he was responsible for new initiations of E&P companies; additionally he generated the firm's macro economic analysis in relation to oil and natural gas price forecasts, which in turn generated the firm's price decks. These price decks were used to generate earnings and cash flow estimates for the firm's peer group of 20 small-cap E&P companies. He joined C. K. Cooper in July 2001 as an institutional salesman. Shortly thereafter he moved to the research department and was promoted to Director of Research in January 2003. He was rated a 5-star analyst by Zacks in 2002, 2003, 2005 and 2006. Prior to joining C. K. Cooper, he was a Partner in Mission Capital which was acquired by C. K. Cooper in 2001.

TWST: Given that we've got low levels of drilling and they have pulled in capital expenditures, what are the companies doing with their cash flow at this point?

Mr. McPherson: Unfortunately, at these prices, their cash flow is really not that much. When you go from a $100 oil environment and a $10 gas environment to a $50 or $60 oil environment and a $3 or $4 gas environment, your cash flows have been halved also. So most E&P companies traditionally spend their cash flow, and those that were savvy enough to access the capital markets and/or debt markets are able to expand production through acquisitions and spending more money. What we're seeing is that the M&A side has not picked up yet and I think that could be a second half story or maybe a winter story, but there's been such a difference between the buyer and seller, they are so far apart that you almost have to wait for a lot of these sellers to get desperate, to the point that the banks are foreclosing them into bankruptcy. I talked to one executive and his banks had advised him to wait till October because that's when if you came up for re-determination in early March, your bank says, look, you've got six months to either sell something or to deleverage or we're going to make you do it in October. And I think you're going to see some of those assets starting to hit the market this fall and it could lead to a nice robust M&A market for the better run companies.

TWST: Are they going to buy assets or companies or both?

Mr. McPherson: I think it depends on each company. I mean, we've seen the Chinese buy a couple of companies. If you're in a distressed position and you have debt and you're deleveraging, it's more difficult to argue that you should reward the shareholders. When you have a company that the bank is foreclosing on, those assets are going to get the lowest price, and you're seeing that right now. It's no different from the housing market. Why save a guy that got over-leveraged and took out three mortgages? You don't have to. When there are three houses on the block that are all in the same predicament, you're going to go for the best price. It literally becomes a commodity. So when you apply that model to the E&P business, you're looking at so many asset packages and so many things that during the good times maybe shouldn't have been done, that people are saying we're going to wait and try to get the best price that we can.

TWST: No need to rush.

Mr. McPherson: Yes. I think that's why it's been a slow year on the M&A side. There have not been any, that I know of, major company buyouts. There have been assets sold here and there. You're seeing some joint venture partners like a lot of the bigger European majors have been coming into the Haynesville Shale via the EXCO (XCO) deal, the Chesapeake deal, but nothing as far as just an outright buyout. A lot of these JVs are good for both sides of the party, but it's a little different from the way the model used to be. It used to be, you formed a small E&P company to grow it to a certain level and then sell it to a bigger competitor. The argument I made to an investor recently is that we used to reward these small companies for undeveloped acreage, but nowadays it's almost a liability because if they want the money to develop those assets, they're either going to lose the leases or they are going to figure out a creative way to keep those leases, which could be detrimental to the shareholders.

TWST: So times really have changed.

Mr. McPherson: It's amazing.

TWST: Early on, you said the key is management. How do you identify good management?

Mr. McPherson: You have to go out and meet them. You have to follow them. There's rarely a time when I've recommended a stock that I hadn't watched it for at least two or three quarters. You take notes on the conference calls, listen to what they're saying, what they're guiding you on. Are they hitting their marks, are they hitting their metrics? If they're not hitting them, what's the reason? Is it a reasonable reason, is it something that's going on in the industry, or is it something in particular that they're doing? And a lot of it is just meeting people and making character calls on people. You let the numbers guide you and you look for relative value within the sector and you try to pair that with people who you feel that you can trust, and usually that's a recipe for success.

The Wall Street Transcript is a unique service for investors and industry researchers - providing fresh commentary and insight through verbatim interviews with CEOs and research analysts. This 60 page special issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online .

The Wall Street Transcript does not endorse the views of any interviewees nor does it make stock recommendations.