The E&P smaller caps: the signs look good for investors interested in the midcap oil and gas exploration and production market. Natural gas prices are projected to stay strong, yet company valuations remain low--for now, at least.

Publication: Buyside

Publication Date: 22-JUN-03

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COPYRIGHT 2003 Adams Business Media

The stocks of mid- to small-cap oil and gas exploration and production (E&P) companies--those having less than $1 billion of market capitalization have experienced a nice surge in stock value. This is thanks to public statements by Federal Reserve Chairman Alan Greenspan and other officials on the tight U.S. natural gas supply-demand picture.

There remains a large amount of upside potential in these companies' stocks, according to E&P equity analysts. They say investors who want to capitalize on natural gas fundamentals would be wise to consider this smaller breed of E&P companies.

"The small-cap companies [of less than $500 million of market cap] particularly have been overlooked for so long," says Phil McPherson, associate director, oil and gas group, C.K. Cooper & Co., Irvine, California. "They've made an exaggerated move here [this spring], but I think we're in the third or fourth inning of the game. We still have a lot of potential to the upside."

What is the rationale behind investing in the sector? Stephen Smith of independent research firm Stephen Smith Energy Associates, The Woodlands, Texas, offers three simple reasons as to why he's bullish on E&P companies. The macro-environment for natural gas and oil prices is very healthy.

Two, the mid- and small-cap E&P stocks have only recently responded to these trends, and their valuations remain quite compelling. Three, the service companies that supply these E&P companies with their drilling rigs...

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