It’s too early to get a handle on the economics of the Eagle Ford shale play, led by Petrohawk Energy Corp. in South Texas, “but that is an exciting shale to watch,” says Jeb Armstrong, senior oil and gas E&P analyst for Calyon Securities (USA) Inc. in New York.

Meanwhile, the Marcellus continues to have strong potential, and development of the Haynesville play will affect gas markets and service-company stocks, he and Mark Urness, Calyon managing director and head of energy research, also based in New York, add.

The analysts discuss U.S. shale plays and describe their top E&P and oilfield-service stock picks in “Opportunity Knocks: Evaluating Oil and Gas Stocks in the Current Market Environment,” a webinar presented by, an energy-intelligence product of Oil and Gas Investor magazine, and sponsored by Turks & Caicos Sporting Club at Ambergris Cay, a private, residential club on a private 1,100-acre island in the British West Indies.

The webinar archive is now available at, along with PDFs of the analysts’ slides.

Natural gas prices as low as $4 would result in a rapid self-correction, Armstrong says. Service companies that are more exposed to U.S. producers’ gas drilling, than to North American and non-North American oil drilling, may be in a better seat for an up-cycle, according to Urness, if the U.S. rig count continues to decline sharply.

“This could cause the (gas-price down-) cycle to reverse quickly,” Urness says, thus gas-exposed service stocks “could do better.”

For example, the Haynesville play needs at least $5 gas prices for most activity to be economic. Chesapeake Energy Corp. (NYSE: CHK) is carried in its Haynesville play by a deal with Plains Exploration & Production Co. (NYSE: PXP), “so it is less sensitive (to the $5 hurdle), probably,” Armstrong says.

“The company itself has a tremendous asset base,” he adds of Chesapeake. As for its international gas-marketing alliance with StatoilHydro ASA (NYSE: STO), this “would provide a great opportunity to expand outside the U.S.,” but upside from this, if any, would be realized more than five years in the future. It’s not a short-term play, he says.

As for investor concerns with Chesapeake’s financial profile, “the company just needs to stick to what it’s doing,” and do what it says it will do, he says, while there is some skepticism in the market that it will stick to its plan and show financial discipline. Its $3.2-billion credit facility is tapped out. Armstrong says he is of two minds about Chesapeake’s future: He sees great opportunity, and also sees “tremendous caution right now.”

Here are more comments from the analysts.

-- Cash-rich E&P companies are more likely to buy assets than acquire weaker producers via merger, Armstrong says. Mergers will occur if the industry’s fundamentals worsen and companies that are underwater are forced to merge or declare bankruptcy.

What E&P A&D deals that are getting done are on the buyer’s terms. For example, Chesapeake was unable to make a straight-up sale of its South Texas package and accepted a volumetric-production-payment (VPP) structure instead.

“There are buyers out there, but you have to structure the deal as they like it,” Armstrong says.

Among service stocks, valuations are so low that sellers are reluctant to do deals, Urness adds. He expects overleveraged companies to be forced into divestments in 2009, especially U.S. companies that have too many spec-build rigs. Larger service companies will look to purchase smaller, including private, firms, particularly those with new technology or in new areas.

-- Armstrong’s top stock picks include Range Resources Corp. (NYSE: RRC), which he rates a Buy with a target price of $48. The stock was $34.35 during the webinar. Range is a leader in the Marcellus shale and is conservative in its estimates of its company-wide potential, Armstrong says.

He also recommends Anadarko Petroleum Corp. (NYSE: APC), which he rates a Buy with a target price of $42. The stock was trading at $38.49 during the webinar. Anadarko is a leader in deepwater exploration in the Gulf of Mexico and abroad, and its Rockies production is hedged against the basis differential, he says.

Meanwhile, two additional picks are W&T Offshore Inc. (NYSE: WTI) and Mariner Energy Inc. (NYSE: ME), which are wholly exposed to Gulf of Mexico oil and gas production. W&T is also leveraged to oil prices, as it is unhedged, Armstrong says. The stocks may be interesting upon news from OPEC on Dec. 17 of its plan for further production cuts, which could help push oil prices up.

-- Urness’ service-stock picks include Cameron International Corp. (NYSE: CAM), FMC Technologies Inc. (NYSE: FTI), Schlumberger Ltd. (NYSE: SLB), Pride International Inc. (NYSE: PDE) and Noble Corp. (NYSE: NE).

Urness expects a rebound in oil demand in 2010 as the world’s economies begin to recover. “Stocks have obviously declined in lockstep with crude oil prices…This is an attractive entry point for investors.”

He adds that the recorded 2008 and forecasted 2009 decline in world oil demand would be the first back-to-back declines since the 1980s, when global oil demand fell four consecutive years.

He expects the U.S. rig count to fall by 700 rigs from the August peak of 1,470, and 2009 U.S. capex spending to fall 23% from 2008 spending. Worldwide, he expects capex to decline 15% and the rig count to fall to 2,700 from the 3,330 of this year.

–Nissa Darbonne, Executive Editor, Oil and Gas Investor, A&D Watch, Today,,;