Wildcatting is back, and it may be wilder than ever before.

With rising demand for oil worldwide pushing prices above $25 per barrel for the first time since the Gulf War, more and more tiny energy exploration companies are chasing fortunes across the globe. More than 200 members of the

Independent Petroleum Association of America

have begun prospecting internationally since 1994, and another 700 say they will begin looking overseas within the next five years, according to the IPAA.

With political uncertainty compounding the traditional risk of hitting dry wells, exploration in developing countries is a high-risk game. In the Sudan, a civil war rages not far from a billion-barrel oilfield, while Nigeria's military government has drawn international criticism for executing protesters who have criticized the environmental degradation caused by drilling in its rich fields.

Still, the explorers aren't the only ones taking big chances in the hope of winning big rewards. A growing number of natural resources mutual funds have moved from investing in $100 billion oil companies like

Exxon

to picking winners and losers from the scores of publicly traded small caps. Indeed, it was small-cap stocks that made

State Street Research's Global Resources

fund (MSGEX) the number-one performing fund of 1996.

Among 1996's small-cap winners:

Abacan Resources

(ABACF:Nasdaq), a Canadian company exploring a major oil field in Nigeria and another off that country's coast, which rose from 2 11/16 at the end of 1995 to 11 1/4 today; and

United Meridian

, (UMC:NYSE) which leaped from 17 to 44 in the same span on the strength of operations in Equatorial Guinea.

But be warned: The stocks, which often trade more on expectations than current earnings, can fall almost as quickly as they rise.

Solv-Ex

, (SOLV:Nasdaq) a New Mexico firm with big plans to extract crude from oil shale in Canada, saw its stock slide from 38 in March to 14 today after short-sellers and reporters contended that its unproven technology would turn out to be hype rather than reality.

Last year, though, the news was more good than bad. With oil up nearly 50% per barrel, the average natural resources fund rose 35.4% in the last 12 months, according to

Lipper Analytical Services

. State Street Global, which invests almost exclusively in smaller oil companies, gained 79.2%.

State Street manager Dan Rice is not promising a similar gain in 1997--especially if the price of oil falls. But he remains extremely bullish on his sector.

While the companies Rice follows have seen their price-to-cash flow multiples grow from about 4 in early 1996 to 6 today, Rice says he thinks investors will continue to raise their estimates of what the companies are worth. (Cash flow, rather than earnings, is the industry measurement of choice, since companies with promising fields quickly reinvest any profits.)

Oil prices have now remained above $24 for several months without slowing demand, and Saudi Arabia, which used to consider a price of $18 to $20 in its best interest, has not increased its production to force the price back down, Rice says. If investors start to believe the higher price can stick (which many doubt), they will be willing to value all oil companies more highly.

Among Rice's top speculative picks for 1997 is

Arakis Energy

(AKSEF:Nasdaq), a company that has gotten the attention of several well-known oil industry experts despite its checkered history. Arakis' prospects were detailed in an earlier story in

The Street

. (

Click here to view the story.)

At

GT Global Natural Resources

(GTNAX), which is up 50.8% in the last 12 months, manager Derek Webb is equally bullish on the sector's long-term potential--both small and large caps.

"There's a natural resource boom going on around the world because of liberalization of mining laws and changes in technology," Webb says. "Very few people recognize it. Most of the companies don't trade here in the U.S. They trade in Canada¿.We had plenty of stocks that had been multiple-baggers, and I believe that it's going to continue for quite some time." He says smart investors can "get 20 to 30% per year" even if the price of oil doesn't rise.

But Webb warns shareholders hoping to repeat in 1997 the successes of 1996 that oil prices are likely to work against them this year. On this point, Webb and Rice butt heads. "Nobody should be kidded by the fact of what's going on here--if the price of oil goes down, these stocks are going to go down. Maybe not as much as they went up, but they're going to go down," Webb says.

Webb's top picks include Abacan and small cap

Gerez Energy

, which trades on the Calgary, Alberta stock exchange. He calls Gerez, which also seeks oil off West Africa, "very similar to Abacan. It's just undiscovered." For less risk-minded investors, Webb recommends another holding, $700 million

Rutherford Moran Oil

(RMOC:Nasdaq), a U.S. company that looks for oil in the Gulf of Thailand.

William Burt, co-manager of the

Eaton Vance Gold and Natural Resources

(EVNRX), which has gained 45.0% in the last 12 months, also likes Abacan and Arakis. Burt, a former geologist who has 30 years of experience in the oil industry, says another favorite is $500 million

Swift Energy

(SFY:NYSE).

Swift, the fund's No. 3 holding, has risen from 13 at the beginning of 1996 to 34 today on the strength of finds in South Texas fields abandoned by bigger U.S. companies. Burt calls the company "a plain old-fashioned holding that has done very well."

By Alex Berenson

aberenson@thestreet.com