University of Montana
Colorado School of Mines
. Herrlin has been an analyst following oil and gas production companies since 1994. He previously worked in a similar capacity at
. Before becoming an analyst, Herrlin was a geologist for the
U.S. Geological Survey
Industry Outlook and Style
With demand for natural gas expected to remain strong in the coming year, the only question is whether exploration and production companies will be able to produce enough to keep pace with demand. Herrlin doesn't think so. "I see a tightening gas supply market," says the Merrill Lynch analyst, who specializes in the North American E&P companies.
Up until now, Herrlin maintains, much of the gas supply growth in North America has come from Canadian producers. In the U.S., the independent E&P companies, he says, have been growing solely by consolidation (buying assets either from the integrated oil players or from one another), not by new exploration. In addition, the reserves they have, once flush, are now producing far less than they initially were.
Herrlin sums up the situation with these words: "Now that we're no longer getting large increases in supply from Canada, we're relying on a U.S. resource base that hasn't grown materially in capacity in recent years, despite a lot of drilling. Hence the tight supply/demand balance."
Certain kinds of E&P companies will benefit more from the tight demand than others, notes Herrlin. He urges investors to buy a basket of these stocks based on any one of the following criteria: highly exposed to gas (picks:
); highly exposed to oil (
); big volume growers (
and the already mentioned Energy Partners); substantial exploration programs (
, plus the aforementioned Anadarko, Apache, Energy Partners, Newfield and Pogo); and a track record of solid acquisitions (
and the previously cited Apache).
Herrlin concludes: "Unlike oil service companies, E&P companies are not homogeneous. They're heterogeneous, with such elements as
they produce it,
they sell to and
their operating costs are being different across the board. So you have to pick the right names, and the best way to do that is by owning a basket." (Merrill Lynch has had investment banking relationships with all companies recommended in this article.)
Favorite stock for next 12 months:
12-month target price:
"Apache is an able consolidator that has been growing -- both on a gross and a per-share basis -- in a cost-effective manner. It has purchased assets within the U.S. (onshore and offshore) and in Canada in the past year. We've projected the company to grow its cash flow from $12.47 to $13.75 and its EPS from $5.59 to $6.70 in 2001. Please note that our model uses lower 2001 oil prices, and nominally higher gas prices. Given the current commodity strips
the 12-month average price, we may be too conservative."
Rate Their Stock Picks:
Which stock do you like best?
Morris: EOG Resources