By Brian Eriksen Noer, www.naturalGasStocks.com 
March 08, 2005

From Coal-Bed Methane to Natural Gas and Oil, From Exploration to Production, Presenting Companies Represent Attractive Propositions for Mergers or Acquisitions

NaturalGasStocks.com recently sponsored and attended the first annual C.K. Cooper Small-Cap Oil & Gas Conference, which was held at the JW Marriott Resort & Spa in Palm Springs, California. C.K. Cooper’s goal as a company has always been to educate their clients and to present them with sound investment advice. This philosophy was extended to encompass the proceedings at their conference. C.K. Cooper gathered a group of presenting oil and gas companies, all of whom fit the mold of being smaller issues that are beginning to develop their own niche opportunities, and which will eventually become attractive to a larger E&P company as a potential acquisition. Brian Noer reports for NaturalGasStocks.com.

Phil McPherson, Director of Research with C.K. Cooper said, “The long term opportunity within the energy sector remains robust. Large cap E&P companies will spend more money on stock buy-backs and dividends than on global exploration projects, during a time of record commodity prices. This should send one clear message to investors: Large cap E&P companies are cash rich and opportunity poor. Our group of small cap companies are opportunity rich, with limited cash budgets. The conclusion: mergers and acquisitions of these companies should increase to a record pace in 2005.”

Attendees at the conference were given the opportunity to hear presentations by the featured companies, and then to speak with the senior management personally during subsequent break out sessions. NaturalGasStocks.com took the opportunity to speak with not only the presenting companies but also several attendees, in order to gauge market sentiment, and to pass on pertinent information to our readers who may have missed the conference this year, but should circle the date in next year’s calendar. 

Presenting companies at the conference included: Petroleum Development Corporation (NASDAQ: PETD); Berry Petroleum (NYSE:BRY); Infinity Inc. (NASDAQ: IFNY); Canadian Superior (AMEX: SNG); Harvest Natural Resources (NYSE: HNR); Goodrich Petroleum (NYSE: GDP); ATP Oil & Gas (NASDAQ: ATPG); Heartland Oil and Gas (OTCBB: HOGC); The Exploration Company (NASDAQ: TXCO); NGAS Resources (NASDAQ: NGAS); Abraxas Petroleum (AMEX: ABP); Endeavor International (AMEX: END); Contango Oil & Gas Company (AMEX: MCF); Cubic Energy (OTCBB: QBIK); Arena Resources (AMEX: ARD).

Petroleum Development Corporation
“We anticipate that 2005 will be a continuation of the past two years,” said Tom Riley President of Petroleum Development Corporation, “during which we have seen strong commodities pricing, oil remained strong, and natural gas is also staying strong in spite of a very mild winter and summer of 2004. Our perception is that there is currently a combination of mild demand coupled with a strong commodity pricing environment which should remain bullish for 2005.” 

“The last few years have basically been a correction for a lot of bad regulatory policy. We have seen a lot of gas on gas competition in the past, which kept the price of natural gas low while demand continued to increase. Seldom do you have that type of combination like we did throughout the ‘90s, where the cleanest burning fuel was also the cheapest.” 

“Years ago when I started off in the marketing business I noted that the problem with natural gas is that we do not know how to market our product. If we could come up with something like Gucci Gas, then we could charge the premium price that natural gas should command as the most environmentally friendly fuel. Natural gas is still selling at a discount to oil, so investors can anticipate that, as long as oil prices are in the mid thirties or above, then it should be a bullish market for natural gas. 

“I cannot project any further into the future than that – the last time I tried, not only did they take my crystal ball away, they broke it. We are subject to a lot of international factors – oil pricing and the worldwide economy, which are both bullish factors, but there is always a cyclical nature to our business.”

The Exploration Company 
“The Industry window that has presented itself due to the world supply and demand equation puts us on center stage, which is very exciting,” said Roberto Thomae, Vice President-Capital Markets for The Exploration Company (NASDAQ:TXCO). “We’re focused on the Maverick Basin in Southwest Texas along the Mexican border, one of the hot plays onshore in North America that offers multiple opportunities for exploration and development.

“While we’re enjoying this window of opportunity today, we have worked hard for more than fifteen years to be where we are, taking advantage of this opportunity. We are prospect rich. We are blessed with more attractive acreage than we could drill in ten years at our current rate of activity,” Thomae added.

TXCO started to acquire Maverick Basin acreage in the late 1980s, deciding it was under explored but promising. The majors first explored there as far back as the 1950s but met with limited success. “They walked away because the profit was not there using the technology that was current at the time,” Thomae said. “New technology, including 3D seismic analysis and horizontal drilling, have helped uncover the basin’s profitability for TXCO. Over 75% of our acreage is covered by proprietary 3D seismic analysis. It has taken us years to accomplish this but it is paying off for us.”

TXCO did not experience positive cash flow for the first ten years of their time in the basin. The company ethos was, and is, to grow with the drillbit, to unearth organic growth through science. “Five years ago we started showing a positive cash flow when gas was a buck and a quarter and oil was eight,” said Thomae. “We’ve come a long way since that time.”

Escalating prices and competition currently make it difficult for new players to put Maverick Basin acreage together without taking on a partner who is already in place. “That is us – we have over 700,000 acres, or 1,100 square miles,” he added. “We welcome the opportunity to work with attractive industry partners. We offer better-capitalized partners seeking prospects a great opportunity by joining with us in the basin.”

Asked to project how the industry would fare in the new few years, Thomae said that, “short of a world calamity, the demand and supply equation is clearly out of balance. Population growth is unstoppable. China, India, and Brazil are creating more consumers, and those countries blessed with natural resources will be even more blessed going forward. It is a wonderful time to be in this business.”

Infinity
Stan Ross, CEO and President of Infinity Inc., believes that his is a very unique energy company. Infinity encompasses not only one of the largest oil field service companies in Eastern Kansas and Northeast Oklahoma, but also an E&P company with developments in the Rockies and Texas. The Oil Field service portion of the company has been around for over 50 years, which Infinity acquired in January of 1994. The company started its E&P division, in order to develop properties for their own interest in January 1996. 

“We are now the largest service company in Eastern Kansas and Northeastern Oklahoma,” said Ross. When we first acquired that company back in 1994 it was only generating $4 million in revenue. Last year we eclipsed $15 million, all through internal growth - no major acquisitions - mainly by moving into new areas and getting larger market shares. Our first property was roughly 41,000 acres in the Raton Basin, just west of Trinidad Colorado. Today we have over 240,000 acres in 5 different regions, but the exciting thing about our company is that we have had some type of activity on every one of our prospects over the past 6 months, making this an exciting time for our company.” 

In Ross’ opinion, the energy market looks strong, and he believes that the next three to four years will be profitable ones. “It is easy to state that the energy sector is the place to be for investors. If you as an investor can find the young small cap companies that are truly trading and have some upside (not the ones where the stock is so thinly traded that their stock is somewhat manipulated), companies like the ones presenting today at the C.K. Cooper conference, there is great upside available. If I was on the outside and not involved with Infinity I would come to Phil McPherson and the C.K. Cooper group and definitely look at the companies that they have brought together, because they have a great track record.”

Arena Resources
Arena Resources Inc. has been in operation for four years and the business model that founder Tim Rochford, President, used to form the company was to utilize the years of experience between himself and his partners, in order to design a venture that in his eyes would provide “shareholder value primarily through a low risk venture”. 

Rochford said that this goal was accomplished through the acquisition of assets in a proven category, for example by placing emphasis on properties with a positive cash flow, but of uppermost importance was the acquisition of properties with upside opportunity. “Whether that was through short term enhancement or through longer term development upside opportunity was an absolute must. To date we have closed about twelve of those acquisitions over a four year period and we have amassed somewhere north of $250 million in net asset value by doing so.”

Rochford said that for investors looking at companies to invest in, the key is management history. “In Arena we are certainly seasoned managers, we have industry knowledge and our key goal is to build shareholder value. We have demonstrated that we can build assets through the acquisitions. As was evidenced by the last quarter of 04 and going into 05, we have already started to execute the development side of those PUDs. We are going to continue to acquire assets that complement our key core properties and at the same time develop those that we do have.”

Rochford predicted a number of exciting developments for the industry in 2005: “We are seeing oil prices closer to $50 a barrel than 40 and that will continue to be the case; we are seeing gas holding at north of $5 and comfortably so. In 2005 we will see a number of companies change, either through mergers, acquisitions, or sell outs – there will be a change in complexion. Whether or not that happens to Arena in 2005 remains to be seen.” 

Rochford concluded by saying that, “The conference was great. My hat’s off to the C.K. Cooper team and who put on a first class conference. Being the first small cap oil and gas conference that C.K. Cooper has done, I think the attendance was fine and I’m looking forward to next year’s gathering.”

Regulatory Environment
One of the benefits of attending a conference of this type is the opportunity to meet with and speak to attendees who are able provide information that is pivotal to the market, which in this case was the result of a conversation with Laurence Lese, a Transactional Securities Attorney for the law firm Duane Morris LLP, with his office in Washington, DC. Mr. Lese described the details of how the SEC’s new complex compliance and disclosure regulations have made the life of a public company more difficult and certainly more risky.

“The SEC's regulatory landscape has changed since the Sarbanes-Oxley Act ("SOX") became law in July 2002. The cost of compliance and continued compliance with SOX has been and will continue to be enormous.

“The federal securities laws require that a company’s financial statements must accurately reflect the condition of that company. The new SEC rules, as mandated by § 404 of SOX, state that, depending on the size of a company, that company is required to institute a complete set of internal controls for financial reporting to be reflected in the Form 10-K annual report for the calendar year ended December 31, 2004. The result of this is that these companies have had to invest substantial amounts of funds to establish, check, and test their internal controls. A company’s management (CEO, CFO) will have to assess and evaluate the effectiveness of their internal controls and their independent auditors are required to review that company’s assessment and evaluation.”

Lese continued to explain that the external auditors are then required to attest and to give a statement that is required to be filed as a part of the Form 10-K as to whether the filing company’s evaluation has fairly presented the effectiveness of the internal controls. “This is serious business! These companies have expended substantial amounts of funds to establish these procedures in the expectation that the internal controls will be effective.”

The unfortunate result (in the view of the subject company) of these internal and external audits is that a substantial number of companies, after the expenditure of substantial funds, can expect to determine that there are deficiencies in their internal controls for financial reporting and numerous companies will have material weaknesses. “This is what happens when matters like SOX are rushed,” said Lese. “It has been a very expensive effort over the past year and a half for these public companies to establish these internal controls.”

Moving to matters regarding public companies' 2005 proxy statements, Lese continued: “I do not usually talk in absolutes, but sometimes when the situation requires it I will. The SEC is very serious about the quality of the disclosure about executive compensation in this year’s proxy statements. The SEC will be focusing very strongly and actively on those proxy statements. This is a season when the SEC will - not may – bring enforcement actions against companies whose proxy disclosure about executive compensation is not comprehensive and transparent, or the disclosure is materially otherwise lacking.”

Brian Noer

Brian Noer has a degree in Business and Economics from the University of Western, Ontario. His career in the financial markets spans fifteen years and several continents, including: Manager with The Bank of Montreal in Canada, Associate Analyst with the structured finance group at Moody’s Investor Services in the UK, and Editor for several financial trade magazines in the UK for both Thomson Financial Publishing and Euromoney PLC (titles include Thomson’s trade magazines “The International Securitisation Report”, and “Capital Market Strategies”, and Euromoney’s “Asset Finance International”). Brian recently joined the InvestorIdeas.com portal team as a Writer, Editor and Research Associate.

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