Energy, Energy Service, Natural Gas &amp; Oil Sectors

Energy Deals Have Speculators Looking North

Top 680. Sep 4, 2001 8:59 PM

» JenL_2 - More US-Canada Energy Deals?

And more on the DVN - AXN buyout from 9/4 TSC:

By Christopher Edmonds

Dealmaking is back in the energy business.

The recently acquisitive Devon Energy (DVN:NYSE) agreed Tuesday to buy Canadian exploration and production company Anderson Exploration (AXN:NYSE) for nearly $3.4 billion in cash, a 50% premium to Anderson's closing price Friday.

The deal makes Devon the largest independent oil and gas producer in North America, and has some observers expecting a flood of similar deals. Devon dropped 4% Tuesday morning on concern it was overpaying for the Canadian company's assets; the deal will be slightly dilutive to earnings in the near term, Devon said.

Meanwhile, Santa Fe International (SDC:NYSE) agreed to acquire Global Marine (GLM:NYSE) for $3 billion in stock, a 16% premium to Global Marine's Friday close. The deal creates the world's second-largest offshore driller. Santa Fe dropped 8% Tuesday morning.

Falling Gas Prices

Both deals point to the rising prominence of Canadian natural gas companies, many of which are likely to be targets in coming months as other energy producers look to beef up. The only thing blocking a wave of deals is the uncertainty in the outlook for natural gas prices, analysts say.

Analysts say Global Marine has likely been looking for an international partner to make its business less susceptible to the volatility in natural gas prices. Global stock has plummeted this year as natural gas prices have fallen. And while Santa Fe hasn't providing winning returns either, its international platform has provided some insulation for investors.

"Global has been whacked in the last two months because of its natural gas and Gulf of Mexico focus," says Marshall Adkins, director of energy research at Raymond James and a member of the TSC Energy Roundtable. "Santa Fe has held up, at least relatively, as a result of its international oil exposure."

Adkins notes it is possible that Santa Fe could choose to move some of Global's rigs, currently in the Gulf of Mexico, to more lucrative areas in West Africa or other oil-focused regions.

And that may cause investors to respond favorably. "You will achieve synergies and have more efficient and flexible rig deployment with the merger," he says. Adkins doesn't cover either company, and his firm hasn't underwritten for either.

However, he cautions investors on reacting to energy-services names based solely on takeover speculation. "I don't view it as a real investable concept," Adkins says. "Picking out the ones that may get taken over at a premium is a very difficult thing to do. People will try it, but it isn't necessarily a successful way to invest in the energy services sector."

Dealing and Wheeling

That said, it's hard not to get a little carried away with this industry. Last week we suggested that Anderson was in play, contending that Anadarko Petroleum (APC) was interested. After all, who would have thought Devon was looking at another so close on the heels of announcing its deal to acquire Mitchell Energy (MND)?

"Expanding our presence in Canada has been an important objective for Devon," Devon Chief Executive J. Larry Nichols said in a statement announcing the merger. "Anderson was at the top of our list of acquisition opportunities."

Canadian oil and gas investors like the deal. "We are ecstatic," says Scott Walters, a trader at Toronto-based Research Capital, who sold his Anderson stake this morning. "$40 in this market is incredible. Anderson did well for its shareholders."

Perhaps too well: The large premium and near-term dilution have some wondering if Devon overpaid. "They paid a big price," says Raymond James exploration and production analyst Wayne Andrews. He notes that Devon paid $1.23-$1.44 per thousand cubic feet of proven reserves. Other recent deals were priced around $1.20. "It also increases Devon's debt-to-market-cap above 50%, which could be an issue in a downturn," Andrews adds.

Still, "Anderson's reserves are high quality, and their position in the Arctic is a real plus for Devon over time," says Andrews, who has a buy on Devon and a strong buy on Anderson. Raymond James hasn't banked for either company. "Short term, Devon's road could be somewhat bumpy."

Who's Next?

Assuming there is an urge to merge among other energy companies, many will look to gas-rich Canada for options. "Rio Alto Exploration (RIAEF) should receive some play here," says Walters. "Also Canadian Natural Resources (CED) and Canadian Hunter Exploration (CDHEF) look interesting and, to a lesser extent, Talisman (TLM)." Earlier this year my colleague Peter Eavis reported Rio Alto was being courted by Calpine.

And there are a number of opportunities for synergies in the domestic natural gas market.

"There is a list of probably 10, 15 or 20 names that are mentioned as possible takeovers," says Bryan Dutt, portfolio manager at Ironman Energy Capital and a member of the TSC Energy Roundtable. "Companies like Cross Timbers (CRT) [which Dutt is long] . Burlington Resources (BR) is a large name that is often mentioned; Ocean Energy (OEI) is a hot name of late; Louis Dreyfus Natural Gas (LD) is another."

And while most analysts agree that additional combinations are likely, the recent slide in natural gas prices could slow the process. "I do think there could be a hiccup here in terms of the pace of consolidation because of the volatility in natural gas prices," says Adkins. "It is going to be harder to adjust models and determine price in the current environment."

Christopher S. Edmonds is president of Resource Dynamics, a private financial consulting firm based in Atlanta. At time of publication, Edmonds was long Calpine, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks.

<img src="http://pvcharts.quicken.com/bin/icenter...." width=470 height=250>
DVN, AXD, MND, SDC, GLM, S&P500 1 YR Chart

......Jen

-- posted by JenL_2

Top 681. Sep 5, 2001 6:00 AM

» lcha - Re: More US-Canada Energy Deals?

In response to message posted by JenL_2:

Yep, a 51% increase in your stock price overnight is not a bad deal for Anderson shareholders. Sure wish I owned some.

-- posted by lcha

Top 682. Sep 5, 2001 7:15 AM

» JenL_2 - Re: More US-Canada Energy Deals?

In response to message posted by lcha:

Yeah the byees - MXN & AXN sure have spiked on anticipation of the buy-outs, and the buyer - DVN seems to follow the S&P500 on down (of course the chart doesn't show dividends). Wonder if investors think DVN paid too high premiums for these companies? Maybe investors aren't seeing the long-term value-added benefits of these mergers, and are just looking at the short-term uncertainties created by consolidation and integration of companies.

But that's usually the case - the buyee spikes on the news and the buyer gets whacked, at least temporarily. It seems a lot of folks take the opportunity to sell or take profits when their stock gets bought-out. But there are exceptions to the rule. In the paper sector the current WY hostile takeover bid for WLL has caused WLL to spike, but WY has gone up also. And yesterday's HWP-CPQ buyout news sent both stocks down.....Jen

-- posted by JenL_2

Top 683. Sep 5, 2001 9:45 AM

» lcha - Well Plugging

Sept. 4, 2001, 9:11PM
Tetra earnings projection rises with natural gas well plugging

By NELSON ANTOSH
Copyright 2001 Houston Chronicle

An increasing number of natural gas wells are being plugged, now that the price of natural gas is down.

Tetra Technologies, the largest company doing these jobs on land and one of the two largest offshore, Tuesday revised upward its earnings projections for the year as a result.

There was a plateau in activity from October to March, when gas prices were extremely high, in what is a growth business in the long term, Chief Executive Officer Geoffrey Hertel said.

At $8 to $10 per thousand cubic feet, few companies wanted to permanently kill a well, even if the output was so small it wasn't much of a moneymaker, he said. When the price fell back between $4.50 and $5, there was a fairly substantial increase in well plugging.

Currently, natural gas sells for around $2.40 on the New York Mercantile Exchange, and the upturn in well abandonment is "dramatic," said Hertel. This is true for the Gulf of Mexico and also for the higher number of land wells.

"As the price of gas began to fall, requests for bids escalated," he said in a written statement.

The Woodlands-based company raised its earnings estimate for the year to between $1.55 and $1.88 per share, up from the earlier forecast of $1.30 to $1.70 per share. Its stock gained $1.60 to close Tuesday at $24.41.

Well abandonment and decommissioning is expected to be a $93 to $110 million business for Tetra this year, compared with $60 million last year and around $39 million in 1999. This is up from April, when it looked to do $80 million to $95 million.

The federal Minerals Management Service and states like Texas and Louisiana are increasing the pressure to plug wells, according to Hertel.

Plugging a well on land basically involves pumping concrete into the hole, but offshore and in inland waters it is more complicated because platforms and pipelines must be removed.

Tetra will have to add people and equipment to keep up with the well-plugging demand, Hertel predicted.

Meanwhile, its well testing and services division is doing better than originally forecast, while profitability of its fluids division is unchanged. Well plugging accounts for about 30 percent of the company's revenues.

Lcha commentary

The plugging situation was totally predictable. Enjoy the cheap NG while you can. It won't last long. Once again, our no crisis-no problem attitude has put a comprehensive energy policy on the back burner.

-- posted by lcha

Top 684. Sep 5, 2001 11:40 AM

» lcha - Energy Crisis Masked

Time for energy stocks
Source: CNNfn
Publication date: 2001-09-04

NEW YORK (MONEY) - What ever
happened to the energy crisis? That is a
question a lot of frustrated energy-stock
investors are asking these days. With oil
and natural gas prices in retreat and
Barron's spooking Wall Street with
warnings of "the coming energy glut," this
once hot sector has gone into deep freeze.
The Standard & Poor's energy index is
more than 10 percent off its 52-week high.
Leaders such as ExxonMobil and Royal
Dutch are down and oilfield services giant
Schlumberger -- a stock MONEY plugged
in April -- has been among the hardest hit,
slumping 40 percent.

Momentum investors are running for the
exits, leaving the rest of us to ponder
whether this is a massive buying
opportunity or the end of energy stocks' 2
1/2-year run. We are convinced that the
sector is a buy.

Not only
are
today's "lower" oil and gas prices still quite
high by historical standards, but the stocks
in the sector are incredibly cheap. The S&P
energy index has a price-to-earnings ratio
of only 15 -- 38 percent below the index's
five-year average. "It's 1999 all over again,"
says David Kiefer, manager of the
Prudential Utility and Equity funds. "The
stocks are practically screaming at you to
buy."

Right now that message isn't getting
through, and it's easy to understand why.
Rolling blackouts in California no longer
lead the evening news, and anyone who's
pulled into a service station lately knows
how much gasoline prices have come
down. Between May and August, the
average price of a gallon of regular
unleaded fell 31 cents to $1.40 a gallon.
Natural gas -- a favorite play for speculators
trying to make a buck off California's woes
-- has experienced the most precipitous
price declines. No wonder everyone thinks
the energy crisis is over.

In fact, supplies of oil and natural gas have
barely budged this year, despite the best
efforts of Big Oil to ramp up production. So
why have energy prices fallen?

The answer is slumping demand, not
additional supply. Energy-intensive
industries such as chemical and metal
manufacturing have scaled back production
this year in response to the economic
slowdown. According to A.G. Edwards oil
analyst Greg McMichael, energy
consumption by U.S. industry fell 20 percent
in the first half of 2001 before recovering
slightly in July and August. McMichael
thinks that by early next year, demand will
have rebounded to 96 percent of 2000
levels. "We still have an energy crisis," he
says. "It's just masked right now."

Energy
is a
cyclical
business,
which
means
any bet on energy stocks is in part a bet on
the economy. We believe that the Federal
Reserve's aggressive interest-rate cuts will
lead to an economic recovery in 2002, but
we've hedged a bit with our energy picks.
The four stocks we're recommending may
not get quite the lift from a revved-up
economy as pricier names like
Schlumberger or Enron. But they're great
values nonetheless, and their low P/Es
should help cushion the blow if our
economic optimism proves misplaced.

Anadarko Petroleum

The world's largest independent exploration
and production company, Anadarko (APC:
up $1.03 to $52.78, Research, Estimates)
has increased earnings per share at a 209
percent annual clip since 1996, and it's one
of the only major oil companies anticipating
double-digit production increases for years
to come. No wonder CEO Robert Allison Jr.
thinks his company is getting a raw deal
from Wall Street. "We're trading at a lower
multiple than at any point in our history," he
laments.

Allison
blames
momentum investors for triggering a sell-off
in Anadarko shares. Down 21 percent from
its high, the stock now trades at 11 times
2001 earnings, a huge discount to
Anadarko's five-year average P/E of 48. Of
course, every CEO will tell you that his
stock is too low, but Allison has put his
money where his mouth is with a $1 billion
stock buyback plan announced in July. Add
to the mix impressive results from new wells
in Algeria, and Anadarko is a stock we
think could quickly move from $60 to $75 --
and still be underpriced.

Chevron

Over the past five years, Chevron has
increased its earnings at an annualized rate
of 19 percent vs. 12 percent for
ExxonMobil. Chevron (CHV: up $0.59 to
$91.34, Research, Estimates) also has a
higher dividend yield than Exxon, 2.8
percent vs. 2.2 percent, yet its current P/E
of 12 is five points lower than Exxon's.
Exxon is a great company, but we cannot
think of any good reason why Chevron
should be that much cheaper. Neither can
Goldman Sachs oil analyst Arjun Murti,
which is why Chevron is his top Big Oil
stock pick. "We think the valuation gap
ought to close to 2.5 P/E points and could
ultimately go back to parity," says Murti.

The catalyst for a higher Chevron P/E (and
thus a higher stock price) could be its
pending $38 billion acquisition of Texaco.
Murti believes Exxon's current premium
stems from its larger representation in the
S&P 500 index -- 2.69 percent vs.
Chevron's 0.56 percent. "As the S&P 500
was rising at a 20 percent clip during the
latter part of the 1990s, many active
portfolio managers felt pressure to own the
bellwether index names," Murti says. Once
the Texaco deal closes, Chevron's S&P
500 weighting should increase to 0.93
percent, significantly enhancing demand for
the stock.

The Texaco merger will help in more
obvious ways as well. "There's a story there
of cost savings that some of the other
majors just don't have," says Michael
Hoover, manager of the Excelsior Energy &
Natural Resources fund. Chevron is
predicting $1.2 billion a year in
merger-related cost savings, and Hoover
suspects that figure is low.

Unocal

We recommended Unocal in our October
2000 issue, calling the company's patent on
clean-burning gasoline the legal equivalent
of a gusher. Since then, the controversial
patent has been upheld by the U.S.
Supreme Court -- a decision that could
force refiners to pay Unocal $100 million or
more a year in royalties -- and Unocal
(UCL: up $0.30 to $35.60, Research,
Estimates) stock is up a solid 5 percent vs.
an 18 percent loss for the S&P 500 over
the same period. The legal wrangling
continues -- the Federal Trade Commission
is now investigating the patent's legitimacy
-- but we think Unocal stock has a lot more
upside.

A driller like Anadarko, Unocal has fallen
out of favor recently as a result of a string of
dry holes, primarily in the Gulf of Mexico.
The company did announce a major gulf
find in July, but the news failed to boost its
stock. At $37 a share, Unocal boasts a 2.2
percent dividend yield and a P/E ratio of
11, well below its five-year average multiple
of 35. Putnam New Value's David King
sees little downside from here. Either the
company gets its act together or it
becomes a candidate for a takeover.
"Shareholders benefit either way," says
King. "I view it as a low-risk situation."

Valero Energy

A leading oil refiner, Valero is another
beaten-up stock whose prospects could be
enhanced by a recent acquisition. Goldman
Sachs' Murti expects Valero's purchase of
rival Ultramar Diamond Shamrock to add
$2 in earnings per share within two years.
With Valero (VLO: up $0.50 to $42.00,
Research, Estimates) currently trading at a
mere 4.7 times 2001 earnings, Murti
argues that Valero has a 72 percent upside
in an average economic climate and
virtually no downside even in a "doom and
gloom" scenario. The stock took a 35
percent hit early in the summer, when falling
gasoline prices eroded refining margins
(the difference between what refiners pay
for crude and the price they get for
gasoline). Periodic collapses in refining
margins are a fact of life, yet investors
reacted as if the sky were falling.

Murti believes Valero, now $36 a share,
could climb to $57 within 12 months. We
think it could happen even sooner. John
Perry, an analyst with oil-industry
investment bank John S. Herold, points out
that rival refiner Tosco will be dropped from
the S&P 500 when its acquisition by
Phillips Petroleum becomes official.
"Valero," says Perry, "will become the nation's largest independent refiner, and that makes it the logical candidate to replace Tosco in the S&P."

-- posted by lcha

APC, CHV, UCL, VLO Quote Comparison

Top 685. Sep 5, 2001 4:42 PM

» JenL_2 - Re: Energy Crisis Masked

In response to message posted by lcha:

Thanks Lcha ....from the article...

We believe that the Federal
Reserve's aggressive interest-rate cuts will
lead to an economic recovery in 2002, but
we've hedged a bit with our energy picks.
The four stocks we're recommending may
not get quite the lift from a revved-up
economy as pricier names like
Schlumberger or Enron. But they're great
values nonetheless, and their low P/Es
should help cushion the blow if our
economic optimism proves misplaced.

Anadarko Petroleum (APC)

Chevron (CHV)

Unocal (UCL)

Valero Energy (VLO)

from Quicken.com....

Evaluation Comparison

Fundamentals Comparison

<img src="http://pvcharts.quicken.com/bin/icenter...." width=470 height=250>
APC, CHV, UCL, VLO, S&P500 3 YR Chart

(of course the chart doesn't show dividends reinvested - and all these stocks have distribute dividends)

Looks like the market is giving us a good opportunity to buy energy stocks......Jen

-- posted by JenL_2

Bulls Drill Deeper For Devon's Value

Top 686. Sep 5, 2001 8:11 PM

» JenL_2 - Re: More US-Canada Energy Deals?

More on the Devon Buyouts from 9/5 Barron's Online:

By Lawrence Strauss

On Tuesday, oil and gas producer Devon Energy announced it would acquire Anderson Exploration, a Canadian firm, for $3.4 billion in cash and $1.2 billion in debt.

Result: Devon's shares fell 5.2%.

The stock didn't fare any better Wednesday, dropping another 2% to close at 42 after hitting a new 52-week low of 42.10

Why the selloff? For one thing, investors think Devon is overpaying for Anderson.

Also, it marks the second recent big buy for Devon, an independent oil-and-gas company whose market capitalization is about $5.3 billion. Last month, it said it would pay about $3.1 billion in cash and stock for Texas-based Mitchell Energy & Development.

All told, the acquisitions would push Devon's debt-to-capital ratio up to 62%, from 35%, according to Hibernia Southcoast Capital. And some worry that Devon could have a tough time integrating these two companies into its own operations.

Devon stock was taking a beating even before the Anderson deal was announced, thanks to steadily falling oil and gas prices.

At 42 Wednesday afternoon, Devon shares were 37% off their 52-week high of 66.75, set March 9. The stock did have a nice run after Barron's Online mentioned it favorably late last year (see Weekday Trader, "Energy Stocks May Resume Their Upward Move," December 5, 2000).

But some bulls argue that Oklahoma City-based Devon would emerge from the Anderson deal as the largest independent natural gas producer in North America.

Mark Baskir, who runs the Strong Energy Fund and holds about 8,000 shares of the stock, says though he's not thrilled with the cost of the Anderson deal, he has confidence in Devon's chief executive officer J. Larry Nichols.

"In a year we're going to look back and say this guy made two good deals in 01 -- Mitchell and Anderson -- when nobody liked [natural] gas," he says.

Pierre E. Conner of Hibernia Southcoast Capital, who reiterated a Buy rating on the stock, says Devon has plenty of experience making acquisitions work, sufficient cash flow to service its debt and the option of selling assets to raise more cash.

The two deals, he writes, add potential growth "in three significant long-term North American natural gas reserve basins" in Texas and Canada.

The shares look pretty cheap, too, trading at about 12 times forward earnings, vs. a median of 21.4x over the past five years, according to Thomson Financial/Baseline. And they change hands at nearly a 45% discount to the Standard & Poor's 500 Index, based on forward earnings, vs. a median historical discount of about 10%.

To the bulls, that may be a value worth drilling for.

Subscribe to WSJ & Barron's Online @ http://www.wsj.com

<img src="http://pvcharts.quicken.com/bin/icenter...." width=470 height=250>
DVN, AXN, MND S&P500 YTD Chart

quote comparison

evaluation comparison

fundamentals comparison

.....Jen

-- posted by JenL_2

Top 687. Sep 6, 2001 12:19 PM

» lcha - NG again

Natural Gas Is Not Burned Out

By Christopher Edmonds
Special to TheStreet.com
09/06/2001 02:33 PM EDT

Has natural gas gone up in flames?

A quick look at current natural gas prices -- trading at less
than $2.50 per million British Thermal Units, or mmBtu --
suggests the early year rally that pushed prices above $10
was nothing more than a short-lived bubble.

Most say natural gas is destined to trade around its
traditional hitching post, about $2, give or take a few
pennies.

However, while that forecast may be spot-on in the near
term, the smart money is suggesting a different course in the
coming year.

Take the recent shopping spree by Devon Energy
(DVN:NYSE - news - commentary), announcing two
acquisitions to expand its natural gas holdings: First Devon
agreed to purchase Mitchell Energy (MND:NYSE - news -
commentary) and then it announced plans to acquire
Calgary-based Anderson Exploration (AXN:NYSE - news
- commentary), both at substantial premiums. Devon's
chairman, industry veteran Larry Nichols, is clearly betting
natural gas will come back.

"The most meaningful thing about this deal is that Devon is a
well-respected E&P company that is a savvy acquisition
player," said Dan Pickering, director of research at Simmons
& Co. and a member of the TSC Energy Roundtable. "They
are seeing the same things that everyone else is seeing
regarding building inventories and a sloppy gas market short
term, and yet they go out and pay a premium."

While it's easy to do deals in the energy arena when markets
are strong, Devon's recent action is bold and, for investors, a
sign that insiders believe in a strong future for natural gas.

Disappearing Demand

Even as analysts were suggesting a new era of $5-plus
natural gas earlier this year, demand was quietly slipping
away, eroding hopes for the new natural gas paradigm.

"Funny things happen when you have an unfettered market
and you see outlying prices," said Marshall Adkins, director
of energy research at Raymond James and also a member of
the TSC Energy Roundtable. "This is what we learned:
When you take prices up as high as we did earlier this year,
you get into no man's land regarding demand fundamentals.
The summer demand for gas is not nearly as robust as we
thought it would be."

When natural gas prices soared early this year, industrial
users switched to lower-cost fuels or, in the case of some
aluminum and chemical companies, shuttered factories
altogether.

Data from Simmons & Co. show industrial demand for
natural gas declined 21% year over year in the second
quarter. "Any time you see commodity demand down 20%,
you will have a noticeable price impact," Pickering noted.
With demand pulled out from under it, gas prices slipped
from above $6 to below $4 -- and just kept falling.

The much ballyhooed summer savior for natural gas --
increased power generation -- never materialized.

"What really crushed the gas markets in the past two or three
months is that the supply of coal and nuclear power sharply
reduced the demand for natural gas-fired generation,"
Adkins said. "Summer demand never materialized."

Short-Term Pain, Long-Term Gain?

No doubt, recent sub-$3 natural gas prices have investors
concerned about the short-term future of natural gas and the
companies that produce it. However, combined with strong
oil and distillate prices, industrial demand for natural gas
will likely pick up as companies that abandoned gas for
less-expensive fuel earlier this year are lured back by
moderate prices.

Fuel switching to natural gas should help provide support
for natural gas prices over time. "You could see sub-$2 gas
but that would be very short term," Adkins said. "Demand
will come back and I think the longer-term range will be
$3.50 to $5.50 going out several years."

Other members of the TSC Energy Roundtable agreed. "In
the short term, we probably have more gas than we need,
which overwhelms longer-term issues, at least for now,"
Pickering said.

However, those longer-term issues continue to paint a
bullish story for natural gas. Demand is expected to grow by
about 2%, while current natural gas production growth is
closer to 1.5%. And, the plethora of power generation
scheduled to come online in the next two years will put more
pressure on supplies. "That will be a 3-4 bcf (billion cubic
feet) increase in demand on top of a 60 bcf market," noted
Simmons' power analyst and TSC Energy Roundtable
member Jeff Dietert. "That is not insignificant."

While the short-term picture is uncertain, one pundit said
there is a clear message in Devon's recent acquisitions: We
are much closer to the bottom than the top in the natural gas
markets.

Said Pickering, "You have to sit back and take notice and
consider Devon views the longer-term situation as a tight
gas market. And, if you are a company wanting to play in the
longer term, these are the kinds of deal you have to do now."

Longer-term investors may want to consider the same
strategy.

-- posted by lcha

Will Oil and Gas Service Stocks Get Energized?

Top 688. Sep 6, 2001 8:58 PM

» JenL_2 - Re: NG again

In response to message posted by lcha:

and one more from 9/6 Barron's Online:

By Dimitra DeFotis

The well appears to be running dry for some oil services and natural gas stocks, which hit new 52-week lows in recent days.

The Philadelphia Stock Exchange's Oil Services Index is down nearly 42% from a year ago.

The culprit is the price of natural gas, which, around $2.40 per million British Thermal Units (BTUs), reflects slack demand in a slow economy plus reserves that could grow even more if North America gets hit by a warm winter.

Natural gas has not seen those prices since 1998, when it hit $2 per million BTUs and crude oil was near $12.00 per barrel.

But things are different today: Oil is trading near $27 per barrel and is expected to hold above $25 if the Organization of Petroleum Exporting Countries continues to cut production.

That would yield a natural gas price between about $3.00 and $4.00 per million BTUs, based on Credit Suisse First Boston's observation that oil has traded on average between six and 8.5 times the price of natural gas since 1993.

And some analysts expect demand to start rising again in 2002 as cheap gas jump-starts industrial consumption. They say natural gas futures prices of $3.00 per million BTUs looking 12 months out suggest more stable prices ahead -- and future gains for beaten-down oil service and natural gas-related stocks.

"I would say the worst is now discounted in exploration and production companies and in the oil service companies," says the bullish Mark Baskir, manager of the Strong Energy Fund. "I think the oil service stocks are tremendous buys here."

Baskir likes oil- and gas-service plays focused on the West Coast of Africa, where big oil companies' deep-water projects are generating work for companies including Houston-based Cooper Cameron (CAM), which gets a third of its revenues from the U.S. natural gas market.

Baskir admits he was a little early on the stock -- down some 26% since he spoke favorably about it to Barron's Online (see Weekday Trader, "Cooper Cameron is a Late Bloomer in Energy," February 1, 2001). But he says it's well priced now, especially in light of recent news.

Cooper Cameron confirmed Tuesday a $100-million order for sub-sea valves, wellheads and other equipment from an Exxon Mobil subsidiary that's drilling off the coast of Angola. Baskir thinks that project may generate more orders than expected.

Wall Street is looking for Cooper Cameron's earnings to grow by more than 30% in each of the next two years -- even with lower commodity prices-- and by 25% annually over the long term, according to Thomson Financial/First Call.

Changing hands at 45 Thursday (near its 52-week low of 42.50 set last week), Cooper Cameron, whose market capitalization is $2.4 billion, is trading at nearly 21 times estimated calendar 2001 earnings of $2.15 a share and at 15.5x projected 2002 earnings of $2.89.

Chief financial officer Thomas Hix says he is surprised that natural gas prices have fallen as much as they have, but he says he takes the volatility in stride. "When there is too much gas, no one drills," he says. "When prices come back, people drill."

Ken Sill, an analyst at Credit Suisse First Boston, likes companies that are even more exposed to natural gas drilling in the Gulf of Mexico, including ENSCO International (ESV) (which Baskir also likes). Sill points out that oil service stocks historically have advanced ahead of increased spending on North American gas and oil drilling.

"It feels like the stocks are trying to find a bottom here," Sill says. "You can afford to own them and wait. The long-term risk/reward [ratio] is very favorable right now."

His logic: The odds of crude hitting $15 a barrel in the near term are low. OPEC has been holding up prices by cutting production, he says, and rogue producers, including Russia, aren't likely to add significantly to supply.

Dallas-based ENSCO (whose market capitalization is $2.5 billion) is an international contract drilling company that is exposed evenly to oil and gas drilling. It also operates a marine transportation business, which ferries supplies and people to offshore drilling sites.

Gulf day rates, the amount an oil company pays daily for a rig to drill, have been down and projects were idled for the summer. But analysts at Standard and Poor's point out that ENSCO's international, oil-focused business (it also has rigs in the North Sea, the Pacific and Venezuela) should offset the slowness.

And ENSCO is operating a new rig in deep water in the Gulf of Mexico, where finding oil is more likely than finding gas, ENSCO treasurer Richard LeBlanc says.

The stock, changing hands Thursday at 18.61, is near its 52-week low set a week ago and is selling at a 40% discount to its oil and gas drilling peers on a price-to-cash-flow basis, according to Thomson Financial/Baseline. It usually trades in line with them.

ENSCO is still expected to grow earnings by 20% annually long term, yet it is only trading at 8.6x First Call's estimated 2002 calendar-year earnings of $2.16 a share.

Of course, the weak economy may still cause these companies to report lower earnings in 2002, and who knows what kind of winter we'll have this year? Clearly, supply must tighten and demand must improve for these stocks to move.

But the stocks already appear to discount the worst news, and they could come back quickly once investors realize that stocks, like wells, always have a bottom.

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<img SRC="http://chart.bigcharts.com/industry/bigc... ESV&comp=DRL:171523&rand=6674" width=527 height=316>
CAM, ESV, Oil & Gas Index (ONG), Oil Drilling Index (DRL), S&P500

always a bit leary of recommendations like this...

Lcha - would trust your opinion on the oil & gas stocks more than I would these analysts' recommendations......Jen

-- posted by JenL_2