CERAWeek: The big picture

CERAWeek, the massive annual energy conference, gets under way in earnest today. But in a Monday afternoon preview session with energy consultants from IHS and CERA, much of the outlook for 2009 appears dim.
The recession will continue for the duration of 2009 and world trade is expected to decline this year for the first time since 1982, according to Sara Johnson, managing director of global macroeconomics for IHS Global Insight.
“We are in for the worst recession of the post-war period,” she said, adding global oil consumption is expected to drop by another 1 million barrels of oil per day this year.
Johnson predicts a modest recovery beginning in 2010 and real economic resilience returning in the 2011 to 2013 time frame. She offers a caveat:

This recession ended the great moderation–that extended period from 1985 to 2005 with longer expansion periods, shorter contractions and less volatility. I think we’ve moved back toward greater economic volatility moving forward.”

IHS Herold equity analyst Andy Byrne said there continues to be a big gap between what potential buyers of energy assets want in terms of price and what potential sellers are willing to accept.
Since Wall Street isn’t valuing companies in a rational way, it is inevitable some merger and acquisition activity will take place in 2009, he said. In this current paralyzed M&A market, there are two important questions, Byrne said: Who pulls the trigger first to buy assets and how deep into 2009 does it take for that to happen?
“As a group, most of these companies are trading below replacement costs,” Byrne said. “Operating costs are not going to be going down all that much this year. Basically, it’s cliff diving or car crashes for valuations.”
Robert Fryklund of IHS said the stalemate between companies and their vendors will continue for at least six months as the cost of business slowly creeps back down.
Low commodity prices combined with the high cost of doing business have stalled many companies’ exploration efforts, which will only feed future supply and price volatility, he said.
“You have to drill to find oil and gas. It’s not found on Wall Street as some would like us to believe.”