Oil and gas prices have been high for many months, and cash flows for producers are breaking records, but the level of drilling activity and the reaction of investors have been less explosive than these positive indicators would imply. Therein lies opportunity. "When people are scared to death to put money to work, that's when contrarian investors should step in," says Dan Pickering, managing director and head of equity research for investment banker Simmons & Co. International, Houston. "The question is, at what point does relatively poor performance become an opportunity and not a reason to avoid these stocks?" He spoke to investors and analysts at the annual Investing in the Energy Industry conference held by the New York Society of Security Analysts recently. Natural gas inventories are about normal after a summer of record injections to storage. The U.S. onshore rig count is high. But curiously, oil and gas stocks, especially for service companies, have not rebounded as much as one might expect. And, offshore drilling contractors have not been able to increase their dayrates to the peak seen in 2001. "One culprit is high expectations," Pickering said. "The issue is, we thought there would be better earnings. Expectations have been falling for the past two or three quarters. But for 2004, we see earnings growth for the service companies of about 20%, based on a 5% increase in international drilling and a 9% increase in the U.S. rig count." -Leslie Haines

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