The Gulf of Mexico’s shallow basin is a “great place” forsmaller independents now and into the future, according to threewho should know. Executives with three of the best performingindependents say their companies will continue to focus nearly allof their attention on finding natural gas in the shallow offshoreareas of Texas and Louisiana.

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

Though their strategies are different, their earnings all haveescalated and their philosophies are nearly identical. There arestill plenty of opportunities for growth in the shallow waters ofthe Gulf, and even if natural gas prices were to fall, theinfrastructure is in place for company earnings to continue torise.

“We have opportunities on all of the properties we own,” saidStone’s Canty. “And with the quality of 3D seismic technology, itjust keeps getting better and better.” Instead of buying propertiesthis year, Stone has focused its attention on farm-ins, andcurrently has four drilling exclusively on the Gulf Coast. Cantysaid the near-Gulf area is perfect for his company because it has aproducing history, existing infrastructure and a low level ofproduction.

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

All of Stone’s success has been tied to a belief that a companyshould take care of what it’s got before it takes on newacquisitions. “We believe you gamble with the drill bit and notwith the balance sheet,” Canty said.

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

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

“We are taking advantage of two things,” said Powers. “One isthat we like the shallow Gulf. Most of our drilling is at less than600 feet. And we like the high deliverability within the existinginfrastructure.” Through the end of this year, Houston Explorationplans to drill up to 12 wells in the Gulf alone. “There’s atremendous amount of potential upside for the company here.”

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

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

“We have had wonderful growth,” Hurley said, with nearly all ofthat keyed to shallow Gulf waters now abandoned by the majors.”It’s our playground, and we consider ourselves Gulf of Mexicodriven.”

Despite the three companies’ successes in the shallow Gulf, theyexpect to see “accelerated” consolidation in some companies,probably within the next year.

“There’s just flat out too many companies out there,” saidHurley. “Until six months ago, it wasn’t too pretty to acquire someof these independents. But that’s not the case now, with theearnings we’ve had.”

Stone’s Canty agreed. “It’s definitely moving that way,” he saidof more companies merging.

Still, Houston Exploration’s Powers said he believes that theshallow Gulf remains a strong area for smaller independents. Theinfrastructure is already there, he said, and there will be littlecompetition from the majors.

“There is a tremendous niche for the independents there,” saidPowers. “There’s probably too many players in the Gulf, but thereis a place for a lot of them. The majors can’t be there.”

Despite the already heavy activity in the shallow Gulf, evenmore companies are going to move into obtaining leases there, saidthe executives. By the time the Minerals Management Service holdsits next lease sale on Central Gulf properties in April 2001,activity will pick up – among small and maybe even some of themajors.

“Next spring’s lease sale has all the earmarks of being ablockbuster sale,” said Hurley. “We welcome the challenge.”

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