Who's to Blame for $4-a-Gallon Gas?

A couple of years ago, many oil producers were delighted to be able to sell two full years of production at $30-$35. That looked like a good idea at the time, and it allowed them to make a lot of money if their production costs were closer to $10. But those old hedges are expiring, and companies can now turn around and sell their current and future production for $60 to $70, even though their production costs are still a fraction of that.

Analyst earnings estimates for oil and gas exploration companies have not kept pace with the rising cost of the commodity, so a lot of premium companies are selling at forward-looking price/earnings multiples of 15 or less, despite earnings-growth rates that are likely to be north of 25% a year.

A good example is Plains Exploration & Production(PXP). Analysts figure it will earn $4.06 a share in 2006, once its two-year-old hedges roll off, which amounts to annualized growth of 125%. Yet at today's price, its P/E multiple on 2006 earnings is just 9.

David Anderson, a portfolio manager at Palo Alto Investors in California, notes that Plains has told investors that it will produce about 65,000 barrels a day in 2006, and that because of hedging it'll probably earn no less than $55 per barrel. Anderson figures that, netting out costs, Plains will actually earn $5 a share in 2006, so it is trading at a forward P/E of 7 today. If oil stays in the $65-to-$70 range, that P/E is actually more like 5. Yet even if oil falls all the way back to $40 per barrel, Anderson says, the P/E is still at 10, which is cheap.

Three other energy exploration companies with valuation and forward prospects profiles similar to Plains, according to Anderson, are ATP Oil & Gas(ATPG), Toreador Resources(TRGL) and Range Resources(RRC).

All are based in Texas, but they have operations ranging from the Appalachians to France, the North Sea, Hungary and Turkey. If the next couple of years go as expected, you could get crude revenge on the suspected gougers by putting $100 into these stocks for every $10 you think you're overpaying at the pump.

Well Worth the Exploration These energy exploration companies have low valuations and strong earnings-growth rates
Company Name	Est. EPS Growth '06	Market Cap	9/6 Price
Range Resources (RRC)	56.5%	$3 billion	$34.61
ATP Oil & Gas (ATPG)	1829	905 million	30.67
Plains Exploration (PXP)	124.8	2.8 billion	36.00
Toreador (TRGL)	69.9	475 million	33.90
Source: MSN Money

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