Former Federal Reserve Chairman Alan Greenspan coined his famous phrase “irrational exuberance” in late 1996; what followed — albeit a few years later — was the dot-com bust. Now, nearly a decade later Greenspan’s prescient commentary is being applied to the exploration and production (E&P) industry.
“I think there are some very irresponsible things happening in our business again,” said John Walker, CEO of EnerVest Management Partners Ltd., who went on to describe the industry as sailing in “the jolly optimists’ cruise ship.”
Walker gave the opening keynote address at Hart Energy Publishing’s A&D Strategies & Opportunities Conference Wednesday in Dallas. Walker sought to strike a cautiously optimistic note at the start of the gathering of upstream wheelers and dealers.
“We prayed for this boom and we got it,” he said. “We are not going to screw it up this time. This time is different.”
<>But then again, the industry is doing just that, Walker said. Robust oil and gas prices have attracted capital to the industry of every stripe. The industry is awash in money in search of deals. Trouble is, some players have been setting reason aside as they reach for their checkbooks. “I believe we are in a period or irrational exuberance,” Walker said.
For instance, he said, good, bad and mediocre engineers are in high demand and often are poorly vetted before they are hired at inflated salaries. Also, some prospects are going woefully under-researched. Walker said he knows of a company that bought 100,000 acres without the aid of a geologist. Thinking it had a shale play, the company bought acreage without any shale underneath it.
“Our industry is awash in capital. Our cost structure is out of control, and that is from top to bottom; that’s from the field to the top management,” said Walker. “Costs have gone up faster than revenues over the last year for sure, and probably over the last two years.”
It’s important for everyone to remember, Walker said, that even the best energy econometric firms are wrong a lot of the time; good supply information is scant, and demand is difficult to forecast.
And overpaying for assets in times like these is not a good thing.
“Millions of dollars are being wasted in the Barnett Shale and other unconventional plays,” Walker said. “In this boom we screwed up again, in my opinion. We’re back to destroying capital. We’re all in the same boat, and I call it ‘the jolly optimists’ cruise ship.'”
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