Gems Lurk in Overlooked Oil and Gas Sector

In a quiet stock market going nowhere for the moment, oil and gas stocks had a good day. The big boys, like Chevron (CHV Quote) and ExxonMobil (XOM Quote), floated to the surface as crude rose $1.17 to $27.05 a barrel.

Gas futures had a good day too. Oil and gas companies have been rallying since late February. From the lows of last year crude oil prices have rallied more than 100% as the recovering global economy has increased demand for oil and as OPEC has shown a surprising ability to agree on production quotas.

The most investable news of the day may have been an announcement by the largest independent oil and gas company in North America, Alberta Energy (AOG Quote). Alberta Energy said it has just picked up a further 1.2 trillion cubic feet of gas reserves through its purchase of McMurry Oil, a private company. AEC said that as a result of the acquisition, it would see a 20% increase in natural gas sales over 1999 and a similar boost to cash flow and earnings per share. The Canadian brokerage RBC Dominion Securities concurred with the company's estimates in a brief report issued today. (RBC Dominion did not disclose any investment banking activity performed for AEC within the past 12 months.)

Ready to Step on the Gas? Alberta Energy, one year

AEC may be little known, but it is not that small. Revenues last year were C$2.8 billion with operating income of slightly more than C$1 billion. Its domestic division owns vast tracts in Western Canada. It also has a 13.75% interest in Syncrude, a consortium of companies that operates the world's largest facility for the production of crude from oil sands. The company's international division has successful drilling operations in Ecuador and Argentina and is exploring in Australia and Azerbaijan.

The stock closed today on the NYSE at 33 5/8, up 1 3/16 on news of the acquisition. At that price, the company trades for about four or five times this year's cash flow and three times estimated 2003 cash flow.

Why so cheap? It isn't tech. And it's in Canada. Few major brokerages outside Canada follow the company.

It has not gone unnoticed by all, however. The largest outside investor in AEC is Chieftain Capital Management, a value-oriented investment firm based in New York with a fabulous performance record over the past two decades. The (VWNDX Quote)Vanguard Windsor fund also holds a slug of the stock. And Morgan Stanley Dean Witter rates the stock a strong buy (the firm has done underwriting for Alberta in the last three years).

The stock has been stuck in a trading range for the past nine months. If you think that oil and gas prices are not about to collapse, the company's expansion suggests a gusher of cash to come.

This isn't the only company in the sector with solid prospects, but it is an example of some of the opportunities in this often-overlooked part of the market.