Industry leader John Walker says the abundance of capital available to oil and gas producers should be used wisely.

"All of us are optimists. We buy into [that commodity prices are going] up, up, up. At times we need to reflect on where we are," he told more than 300 attendees at the fifth annual A&D Strategies and Opportunities conference in Dallas recently, hosted by Oil and Gas Investor and A&D Watch newsletter.

Walker is president and chief executive of Houston-based producer EnerVest Management Partners Ltd., which operates 11,000 wells in 10 states, and he is past chairman of the U.S. industry's independent oil association, the IPAA.

"It's been too easy," he said of accessing capital. "This is a hard business...We need to be making rational decisions right now."

As retired Fed chairman Alan Greenspan said in the late 1990s that stock-market investors were experiencing "irrational exuberance," Walker said oil and gas leaders could succumb to the same. "I believe we are in a period of irrational exuberance," he said. He noted, however, that stock prices continued to rise after Greenspan's comments and today are higher overall than then.

Caution should be exercised, Walker said. "We prayed for this boom. We got it. We're not going to screw it up this time." The industry is awash in capital now. "There is way too much capital chasing too few deals...Our costs are out of control." Engineers are being hired after one interview and being overcompensated. "I'm not even sure if they're checking their pulse."

One example of uncareful spending: a producer amassed 100,000 acres in a shale play and discovered there is no shale under the acreage. "They're just south of the shale," Walker said.

Walker believes the majority of the wells being drilled in the U.S. right now will not generate a rate of return of 15% or better. "Millions and millions of dollars are being wasted in the Barnett Shale and other unconventional gas plays...We're screwing it up again."

Reliable information on the direction of oil supply and demand is scant. The International Energy Agency is incessantly updating its forecasts. "I have friends who are betting their careers and companies [on forecasts]." They didn't experience, or they don't remember, the 1980s and situations such as having to pay back $20 million they didn't have. "I've had to do that," Walker said.

Don't lose heart, he suggested: continue to hedge.

"What are you going to do if there is a downturn?...We have plenty of dry powder...We'll do better in a downturn than in this market," he said. (For more on capital access, see "The Capital Push," this month's cover story.) Successful operators will have capital to survive it. "The critical path is good people," he added.

EnerVest has hired 61 people this year and has been named the best place to work for several years by the Houston Business Journal. "It's hundreds of small things that lead to success," Walker said.

An attendee asked Walker to define "downturn." He answered, "You'll know it when you're in it." Surviving near-month natural gas prices, which were approximately $7 on Nymex at the time of his speech and were around $5 at press time, will help.

He suggested, "Should we be running our economics at $8 or $11 [gas] if the cash market in October is $4?"

Prior to EnerVest, Walker was president and chief operating officer of Torch Energy, which grew from $200 million in assets to $1 billion. Some of Torch's former assets in the Black Warrior Basin of Alabama will be offered this month in an IPO by owner Constellation Energy Commodities Group.

Walker was also responsible for creating Nuevo Energy Co., a California heavy-oil focused producer that is now part of Plains Exploration & Production. He began his energy career as an analyst and was named "All American" by Institutional Investor six consecutive years.

EnerVest is a specialist in "messy deals," he said, and has a strategy of acquire, fix up and sell. For example, one acquisition was of San Juan Basin assets for $26 million from GE Capital that EnerVest eventually sold to Texaco in 2001 for $121 million. "Rather than selling it down the food chain, we sold it up."

Assets today are expensive, relative to past prices, yet commodity prices are generally strong and indications are that they will remain strong, he said. "We're schizophrenic," Walker said. "We don't know if we should be buying or selling right now."