Money is flowing back into the exploration and production (E&P) business in Houston “like Niagara Falls,” and the curse that Enron left on the merchant energy business is beginning to dissipate. Investment banks clearly don’t want it ever to return again, according to energy analyst John Olson of Houston-based Sanders Morris Harris.

Speaking Thursday at the Natural Gas Roundtable in Washington, DC, Olson said the signs of recovery are everywhere in Houston today. In addition to adopting a new culture of improved business ethics, major energy merchants have been able to successfully refinance their debt, unload assets and get operations on track, albeit a significantly different track than before.

Many of the energy merchants have slowly risen from the dead and appear to have the strength to continue. “Once Reliant got its refinancing done, CMS got its done, Dynegy and AES did theirs and the rest followed, which shows that the banks clearly don’t want another Enron,” he said. “They are very scared of another [energy company] bankruptcy.”

Oneok appears to be the top survivor among natural gas marketing firms, he said. “With $6 billion in assets, [Oneok] in the last five years took its earnings from $17 million to $180 million. They locked up a tremendous amount of storage, and they are one of the largest marketers coming out of the Rocky Mountain region. They can target every region of the country. They have their act together. These guys are the runaway winners in the marketing business.” Olson predicted that Oneok would show $230 million in earnings before interest and taxes from marketing this year, up 28% from 2002.

While energy merchants appear to be recovering, the E&P business looks like it will be the best investment on Wall Street over the next five years, Olson said. Much of the help that has arrived for marketing and trading and E&P has come from higher oil and gas prices, and that help isn’t likely to go away anytime soon. Oil and gas forward prices “are as strong as you will ever see them,” he noted. “The forward market is flat at extremely high price levels and it’s never been that way before.

“Under normal circumstances you would have a curve that looks like a hyperbola because of the time value of money. But there’s no decline out there…It’s obviously a windfall when you value your [oil and gas] reserves for credit purposes or sell your reserves. The numbers are humongous out there…It’s poetry in motion for exploration and production.”

Olson said that wellhead revenues will be better over the next 10 years than they’ve ever been for the E&P industry. “Over the next five years, we’ll have wellhead revenues averaging $148 billion/year. This year it will be about $175 billion [compared to $111 billion over the last five years and $83 billion in the 1990s]. What’s not to like? This is why money is flowing into Houston. It is why Houston, I think, is going to be the strongest economy in North America for the foreseeable future.”

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