An Outsider View on Oil and Gas

Folks in Houston tend to feel like the oil and gas industry revolves around them. That's fine -- we can let them think that. They have to live there, after all.

Meanwhile, there's a healthy number of E&P companies headquartered to the northwest, in Denver, Colorado. Three of the leading Denver outfits just reported year-end results -- and more importantly, their plans for 2009 -- so let's see how they're reacting to the downturn.

First we have St. Mary Land & Exploration (NYSE: SM  ) . I haven't followed St. Mary too closely, but a few things jump out at me right away. The firm exited 2008 with a strong debt-to-capitalization ratio of 34%. I also notice that exploration and drilling (E&D) costs in 2008 matched cash flow from operations -- another indicator that the firm didn't overstretch during the boom times.

From a peak of 16 operated rigs in mid-2008, St. Mary is dialing back to an expected average of six for 2009. This might seem drastic, but it's a far cry from zero, and there's nothing forcing the company's hand here. Management simply noted that "deferring additional investment for development drilling is appropriate in the current highly deflationary industry cost environment in order to improve returns on invested capital."

Compare this to Whiting Petroleum (NYSE: WLL  ) , who recently socked their shareholders with a large share dilution at $29 (roughly 25% of the 52-week high). E&D costs last year overshot discretionary cash flow by 27%, and Whiting drew pretty heavily on its bank line to fund its program. Now that it decides it has to live within cash flow, Whiting is dropping down from 18 rigs to just four. That doesn't count the firm's non-operated interest in some of EOG Resources' (NYSE: EOG  ) Bakken activity, but the picture is pretty clear. Whiting went wild, and shareholders are paying the price.

Finally, let's turn to Bill Barrett (NYSE: BBG  ) . I pointed to Bill as a potential way to tap the Rockies back in August. Of course every E&P has been dumped since then, whether they have hedges in place or not. But this company's well protected in 2009, with 73% to 76% of production hedged. Combine that with a very low cost structure, and you're looking at a company that, along with the likes of Ultra Petroleum (NYSE: UPL  ) , should have a relatively comfortable 2009.

Related Foolishness:

• EOG is the E&P for me.
• Meanwhile, this rival is dropping daily.
• Here's another well-hedged operator.