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Shallow Gulf 'Great Place' for Small Independents

Shallow Gulf 'Great Place' for Small Independents

The Gulf of Mexico's shallow basin is a "great place" for smaller independents now and into the future, according to three who should know. Executives with three of the best performing independents say their companies will continue to focus nearly all of their attention on finding natural gas in the shallow offshore areas of Texas and Louisiana.

D. Peter Canty, COO of Stone Energy Corp. joined Houston Exploration Co. CFO Thomas W. Powers and Chieftain International COO Stephen C. Hurley for a panel discussion last Wednesday at the Dain Rauscher Wessels Energy Conference in Houston.

Though their strategies are different, their earnings all have escalated and their philosophies are nearly identical. There are still plenty of opportunities for growth in the shallow waters of the Gulf, and even if natural gas prices were to fall, the infrastructure is in place for company earnings to continue to rise.

"We have opportunities on all of the properties we own," said Stone's Canty. "And with the quality of 3D seismic technology, it just keeps getting better and better." Instead of buying properties this year, Stone has focused its attention on farm-ins, and currently has four drilling exclusively on the Gulf Coast. Canty said the near-Gulf area is perfect for his company because it has a producing history, existing infrastructure and a low level of production.

Stone, based in Lafayette, LA, may be small, but its strategy has paid off. By focusing all of its attention on properties that are about a two and a half-hour helicopter trip from the home office, Canty said that since 1993, the company has had a 78% drilling success rate. It now produces 202 MMcfe/d. Cash flow has risen 77% in the last three years, and it has outperformed the Standard & Poors index with a growth rate of 25% a year.

All of Stone's success has been tied to a belief that a company should take care of what it's got before it takes on new acquisitions. "We believe you gamble with the drill bit and not with the balance sheet," Canty said.

Houston Exploration's Powers said his company, which has 97% of its business tied into natural gas, with most of it in the Gulf, operates on three principles: accumulate great assets; focus on the core areas; and maintain a high working interest. By keeping its operating base solidly in the Gulf, its strategy appears to be working.

Currently, Houston Exploration has 237 Bcfe net proved reserves in the Gulf alone, with a total for the company of 541 Bcfe. (The bulk of its other reserves are in South Texas, with some in Louisiana and West Virginia.) Average daily production for the first half of 2000 was 93 MMcfe/d in the Gulf alone - overall, its total average daily production was 214 MMcfe.

"We are taking advantage of two things," said Powers. "One is that we like the shallow Gulf. Most of our drilling is at less than 600 feet. And we like the high deliverability within the existing infrastructure." Through the end of this year, Houston Exploration plans to drill up to 12 wells in the Gulf alone. "There's a tremendous amount of potential upside for the company here."

Chieftain's Hurley, who admitted that of the three, his company is the one with a visibility problem despite its success in the Gulf, also was high on natural gas prospects there. Chieftain, headquartered in Edmonton, AB, actually set up its exploration office in Dallas, and it does not drill in Canada; rather nearly all of its business is focused in the Gulf. In fact, 95% of Chieftain's projected gas sales will come from the Gulf, he said.

At the end of June 2000, Chieftain ranked among the top 10 independents offshore, in water depths up to 600 feet with interests in 148 Gulf blocks. Only 11 are in deep water. So far this year, the company has had 10 gas discoveries, and it has begun four new fields. For the first six months, its drilling activity had increased 148%.

"We have had wonderful growth," Hurley said, with nearly all of that keyed to shallow Gulf waters now abandoned by the majors. "It's our playground, and we consider ourselves Gulf of Mexico driven."

Despite the three companies' successes in the shallow Gulf, they expect to see "accelerated" consolidation in some companies, probably within the next year.

"There's just flat out too many companies out there," said Hurley. "Until six months ago, it wasn't too pretty to acquire some of these independents. But that's not the case now, with the earnings we've had."

Despite the already heavy activity in the shallow Gulf, even more companies are going to move into obtaining leases there, said the executives. By the time the Minerals Management Service holds its next lease sale on Central Gulf properties in April 2001, activity will pick up - among small companies and maybe even some of the majors.

"Next spring's lease sale has all the earmarks of being a blockbuster sale," said Hurley. "We welcome the challenge."

Carolyn Davis, Houston

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