This week, in our focus on the winning analysts in each industry category from our
Analyst Rankings -- Equity 2000
, we profile the top analysts tracking oil and gas exploration and production stocks. Next week we'll look at a sector much in the news recently as California's power crisis continues: electric utilities. (Our last focus was on
integrated oil and gas.)
Natural gas prices are expected to be substantially higher than normal this year, though they most likely won't return to their peak 2000 levels, which set all-time highs. That is the shared view of our three top oil and gas exploration and production analysts: John Herrlin Jr. of
, Phillip Pace of
Credit Suisse First Boston
and Robert Morris of
Salomon Smith Barney
Put in numerical terms, natural gas has historically traded around $2 per thousand cubic feet. But last year the commodity broke out --
out -- of that pattern, surpassing $9. Prices recently topped the $7 level. This year, Pace and Morris consider $4 to $5 a likely average.
No. 1-ranked Herrlin forecasts that demand will continue to outstrip the already tight supply of U.S. natural gas, keeping prices high. He suggests investors buy a basket of E&P stocks. Criteria he advises them to use for selecting the stocks include: Focus on companies that are either highly leveraged to oil, highly leveraged to gas, are big volume growers, major explorers or solid acquirers of other E&P companies.
stands out as his favorite stock. He rates it a leader in three of the above categories. (Merrill Lynch has an investment banking relationship with Apache.)
Pace, for his part, is placing his biggest bet on driller
, which he calls the industry's "best large-cap company" and which he thinks will be "the only large E&P stock that can sustain double-digit volume growth" in 2001. Pace is also keen on small-cap developer
, which, by owning all of the land it procures its gas from, has a low production risk and the ability to grow volume some 20% annually, three times the industry average. (CSFB has an investment banking relationship with Anadarko, but not with Mitchell.)
Morris nominates one large-cap,
, and two smaller-caps,
Cross Timbers Oil
, as potential top performers. (Salomon has no investment banking relationships with these three companies.) Though EOG may not increase production more than 5%, says Morris, it has the ability to outdo its peers on the cash flow and earnings fronts because it "has not hedged any of its gas production" and, furthermore, has signed contracts with oil service firms that insulate it "from increases in rig rates and service costs."
Oil and Gas Exploration and Production
Rate Their Stock Picks:
Which stock do you like best?
Morris: EOG Resources