If high oil and gas prices turn out to be the new paradigm, E&P energy stocks may not be fully valued, analysts say, and service and supply-related stocks have even more room to run. The only problem is, investors are still wary. They keep waiting for energy stocks to pull back enough to set up the next buying opportunity. A small undercurrent of worry lay behind bullish enthusiasm at two annual investor meetings in Denver in August. The power of organic growth through the drillbit-or by building new drilling rigs-took center stage. Natural gas prospects, unconventional resources and reserve replacement were some of the hot topics at the 17th Rocky Mountain Natural Gas Strategy Conference sponsored by the Colorado Oil & Gas Association (COGA) and The 10th Annual Oil & Gas Conference sponsored by EnerCom Inc. "If this is a new paradigm, the stocks are not overvalued," said Calyon Securities (USA) analyst Brad Beago. But investors said it is hard to decide what to do next-one sign was that the presentations by faster-growing micro-cap and small-cap E&P companies were standing room only. Said one institutional investor, "It's getting hard to buy the small-caps now because even they have had a run-up in price. If I short someone due to bad management, they get acquired and their stock goes up. If I short someone because they've done so well and I think they are fully valued, the price of oil goes up again and their stock goes up." Several speakers warned of industry complacency being a potential problem. "The danger is, I think, things are going so well you tend to get sloppy and you don't think things through enough or analyze as well as you should," observed Apache Corp. chief financial officer Roger Plank, speaking at The Oil & Gas Conference. Meanwhile, $6-billion-market-cap Ultra Petroleum saw its stock jump 20% in the three weeks leading up to the conference. The high-growth company, active in Wyoming's Pinedale Field area, needs only 14% of its annual cash flow to keep its gas reserves and production flat-the rest can be used for growth through the drillbit, said chief executive Michael Watford. Due to down-spacing of well locations approved by the state of Wyoming, Ultra's proved drilling locations have doubled to more than 2,000 and its reserves have also doubled, and may total as much as 6 trillion cubic feet eventually, he said. For all the stellar results reported by E&P companies, the service and supply companies are the leading growth vehicles now-and it is their technology and equipment that will enable the E&P companies to drill all that gas in Rockies basins. Rig availability, rig and equipment new-build capacity and costs were other hot topics. One investor commented that the drilling contractors at the conferences "sounded pretty cocky" these days. They may have good reasons-the U.S. rig count and the Philadelphia Oilfield Service Index (OSX) are each at 20-year highs. "This is the first time I have been in an up-cycle as a pure driller [since selling the E&P side of the business to Cimarex in 2002]," said Hans Helmerich, president and chief executive of Tulsa-based drilling contractor Helmerich & Payne. "The difference this time is we have put 50 FlexRigs on the ground since 1998, establishing new performance metrics for the industry. "I think there is a chance for the same old movie to have a happier ending this time." Some 23 additional FlexRigs have been contracted for and are now being built. Thy are designed to be moved quicker between well locations and to rig up faster than older designs, and other innovations cut well costs for E&P operators. The average land rig in the U.S. fleet today is about 25 years old because contractors did not spend to innovate during the last few up-and-down industry cycles. But 75% of Helmerich & Payne's fleet is newly built since 1995. Ray Singleton, chief executive of publicly held Basic Earth Sciences of Denver, said that in the Williston Basin where he is drilling, he had to wait so long on a frac truck recently, his new well was shut-in for a month.

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