Energy guru Tom Petrie agrees with many of his peers that 2009 doesn't appear to hold much promise for the U.S. natural gas sector. Gas prices could fall to half of where they are now if certain events coincide this summer, but he still thinks there's a bit of blue amid the darkening clouds.
The well known industry veteran in 2006 sold his energy advisory firm Petrie Parkman & Co. to Merrill Lynch & Co., and with Merrill's recent transaction with Bank of America, Petrie now serves as vice chairman. He's still enmeshed in the oil and gas markets, and he offered his take on what he thinks will happen in the coming months at last month's Enercom Oil & Services Conference in San Francisco.
"We're living in a 'black swan' world," Petrie told Enercom participants. "We are, in fact dealing with some amazing challenges."
Petrie said the "black swan" refers to the notion that human beings have a tendency to ignore "low-probability" events, such as the sighting of a black swan. "There's a human tendency as a collective group of thinkers to confuse low probability with no probability...but low-probability events can have high impacts," he said.
Globally, natural gas was jolted by a series of events from 2005 until about a year ago, and the market probably thought that constant volatility was about as bad as it could get, he said. And now with industrial demand lagging and an oversupplied gas market, Petrie said a lot of people see only what's not working instead of what may be possible.
For instance, some blame the surge in unconventional gas shales for weighing on U.S. gas markets. Petrie sees some positives there as well.
"As I look at it, the overall long-term promise is so compelling," he said. Producers with "commanding positions" in the shale plays "have compelling longer-term merit," which many of the still well heeled players are considering. "There are serious joint venture possibilities with fairly well capitalized players overseas who are interested in this. They are looking for cutting edge opportunities to get in on the learning curve in unconventional gas resource development to apply that technology elsewhere in the world."
He thinks that a "series of several more joint ventures," similar to the transaction between StatoilHydro and Chesapeake Energy Corp. last year, are on the radar screen. Last November the Norwegian-based operator purchased a 32.5% stake in Chesapeake's Marcellus Shale leasehold (see NGI, Nov. 17, 2008).
"It may not be just like the Statoil and Chesapeake [deal], but one way or another, there will be more leveraging opportunities," Petrie said.
More investment opportunities are emerging for the midstream sector as well, "because of the reconfiguration needed for ancillary gas processing to remove some of the liquids from the 'hotter' LNG [liquefied natural gas] along the Gulf Coast. That's an underappreciated market," Petrie told the audience.
Consolidation among upstream players may happen "to some degree," but there won't be "a revival of consolidation in corporations at the asset level we've see in times past," said Petrie.
"Radical change is creating new opportunities," he said. "There is a zone of rationality that we may be approaching for corporate transactions. Some would say this is a period of severe irrationality, but it's not for those who kept their powder dry. The joint venture route may be an optimum one for the resource plays, and they'll be most valuable to well capitalized producers. They'll fill the void until conditions change."
As in the past, the "first mover advantage is likely...and once the capital markets reopen, this is the way to go...Now we have a disconnect, but there's been a real openness on the part of some players to strike win-win deals" and establish partnerships.
"No question we are finally into a period of meaningful and potentially prolonged oil and gas price retrenchment," said Petrie. "But there's a whole lot we don't know yet" and "it's time to widen our viewpoint. There's a lot of things out of left field, out of right field, in the energy picture, but there are easily as many for the positive as for the negative side..."
Gas prices may trend lower, he warned. "It could happen this year, if we bring on the right surge of gas with LNG in the Gulf at the wrong time. But it's not necessarily the new rule. It just may well be an instantaneous event, a headline event that we'll have to live through."
Like seeing a black swan?
"We have to expand our definition of what's possible," said Petrie. "Europeans said there was no such thing as a black swan because they had never seen one, but then they saw one. We really need to use that mindset. Whatever the time frame is, whatever the global perception, I find myself often thinking of what did I learn in the '80s that would apply to today; what did I learn in the '70s that was more applicable than the '80s, the '90s...Now I have begun to think about the '30s and what may be more relevant to today.
"This business is too interesting for us to be too critical about where the country is going from here," Petrie said. He told the crowd, "Don't give up and work forward from here."
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