The 10-year outlook for domestic gas and oil production companies is “probably about the strongest of any industry,” said Sanders Morris Harris analyst John Olson. Wellhead revenues over this decade are expected to be near double that of the 1990s. There’s no shortage of conventional drilling opportunities. And investors are recognizing the value inherent in the industry.

“For once it looks like the tables will be turned and [E&P companies] will just have a huge flow of money coming in over the transom largely because of these wellhead revenues,” Olson said in an interview with NGI. “I’ve got headhunters down here who are looking for 20 petroleum engineers for one company, 15 geologists for another and five landmen for another and so forth. This is what happens when your rig count goes up 25-30% a year.”

Judging from the rig counts seen recently, there seems to be no shortage of conventional drilling opportunities, he said. “Look at the rig counts going up in Texas, Oklahoma, or New Mexico. You are just seeing year-to-year rig-count gains being 25-30%” except for the offshore.

Overall the outlook is good. The E&P industry can expect $150 billion in annual revenues through 2010 compared to only $83 billion in the 1990s, Olson said.

“Last year they ran $174 billion in revenues. This year we are probably right around that same level. Any way you cut the deck, the gas cycle is very positive for the producing sector in the United States and the same thing applies in Canada as well.”

While corporate America is expected to earn about 14-15% returns on equity after tax with a 50/50 debt equity structure, most E&P companies are right there in the ballpark with 12-15% returns, according to Olson.

Investors are recognizing the value, too. Year-to-date, E&P sector stocks are up 6% while the rest of the market is down about one-half of 1% given the tumble of the last week or so.

Gas distribution companies are doing better than the overall market, Olson noted. Electric utilities also are doing better. Oil service companies are doing measurably better; but they are trading at 25-50 times earnings.

“This cycle is so big because of the E&P sector; it’s the tide that is going to lift all the boats,” he said. “The most dynamic economies in North America for the next five to 10 years easily look like they will be Houston, first of all, then Calgary second. Calgary basically looks like Houston without the trees.

“Denver will do okay as well,” he said. In fact, investors are already paying premiums for Rockies producers.

John Olson will be speaking on May 18 at GasMart in Denver, CO. For more information go to https://www.gasmart.com/.

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