That seems like a bold question, doesn't it? But wherever I go lately, people from every sector of the business-E&P executives, bankers and other capital sources, and M&A experts-say in cautious tones that they see things looking up, finally. And a few have suggested that longer-term, E&P companies, from small-cap independents to majors, will have to beef up the exploration component of their drilling programs because chronic under-investment, coupled with maturity of most domestic basins, are causing oil and gas to be in shorter supply. There is some empirical evidence that trends have turned positive. Attendance at this year's Offshore Technology Conference topped 50,000, the highest level in a decade. More than 930 people were pre-registered to attend the annual investment conference in New York held by the Independent Petroleum Association of America. Drilling activity is rebounding. As of May 9, the U.S. rig count had risen in 14 of the prior 19 weeks, with onshore action increasing while Gulf of Mexico drilling remains flat with 2002. A 15% increase in the count since January was the largest move up that has occurred in the first quarter in the last 15 years, noted S. Wil vanLoh of Quantum Energy Partners, speaking at the IPAA symposium. At press time the rig count was finally above 1,000 for the first time in more than a year. A seasoned veteran of the industry, who was there in 1981 and who haunts our office from time to time, joked, "Great! Only 3,000 more to go!" At last, high cash flows are being deployed into drilling as much as into debt reduction and stock buybacks. But they are not necessarily being deployed into exploration yet. Meanwhile, commodity prices continue to hold, and gas and oil inventories are still low by any historical measure. "These are the tightest energy markets we've seen since the 1970s," analyst Steve Pfeifer of Merrill Lynch told the IPAA. "We think oil inventories will start to recover in 2003, but remain fairly tight. We forecast $5.28 for natural gas this year. Longer term, we see $24 oil simply because it is at the lower end of OPEC's desired price band." Drill, or acquire? Merger and acquisition trends are useful barometers of the industry's answer. During the past 10 years, buyers of producing assets have consistently paid $4 to $5.50 per barrel of oil equivalent, in good times and bad. But that changed around 1999-right along with a move to higher finding and development costs. These days a powerful message is being transmitted about reserve life, production-replacement ratios from drilling, and the inventory of drillable prospects, when you consider that many buyers now pay upwards of $7 and $8 per BOE for assets. Those are data from the first quarter of this year, according to Randall & Dewey's latest report on acquisition and divestiture trends. A few analysts say the old M&A models have about played out. Mergers have not necessarily led to organic reserves growth for companies beyond what they might have accomplished alone, and they certainly have not helped overall U.S. production statistics. Targeted, strategic purchases in specific plays are going to be more the norm than huge acquisitions made just to gain scale. In most cases, the desired scale has been achieved though these megadeals, but the expected economic returns have not yet been realized. Some now dare to say that after all the mergers, the disappointments abroad, the busts, it is time for large companies to go back to exploration. E&P analyst Bob Christensen thinks that Devon Energy's purchase of Ocean Energy is a leading indicator. The deal heralds a new round of exploration, not exploitation, as companies are forced to pull out all the stops to keep growing. Ocean's exploration prospects in the deep water and abroad attracted Devon, to complement its traditional North American production and exploitation operations. Consider this tidbit from Gregg Jacobsen of Randall & Dewey, speaking at the symposium: "Public E&P companies relied upon M&A for an average of 70% of their reserve growth during the past five years. For the majority of E&P companies, transaction activities are the greatest contributor to value creation and value destruction." Merrill Lynch's Pfeifer thinks that after a 20-year down cycle since 1983, a major wave of contraction, restructuring and cost reduction has swept the industry, "setting the stage for a new multiyear up-cycle." But, the economics have changed. "2002 was such a powerful data point, because it was the third year commodity prices were higher, but reserve replacement was not. The higher finding and development costs we're seeing means a higher margin is required. To achieve a 13% return on capital employed in the mid-1990s, with F&D costs of $4 per BOE, companies needed an $18 spot price. Today they need $25 due to increased F&D costs. That's difficult to explain to investors who think $21 when they price these companies' stocks."