Amid these jittery economic and political times, Wall Street sees a silver lining for nervous energy investors sitting on the sidelines. Put simply, analysts are bullish on the prospects for upstream stocks in 2008.

In late January, Joseph Allman, E&P analyst for JP Morgan Securities in New York, asserted that investors should be buying E&P stocks now.

“Costs, cash margins and rate-of-return trends are positive for the group,” he says. “During the past several years, any time cash margins and returns were improving—as the trend suggests is happening now—E&P stocks have rebounded from corrections and surpassed prior peaks, and investors have used such corrections to buy (upstream) stocks.”

But that’s not the only reason Allman offers for plunging into the upstream. The analyst notes that, in late January, E&P stocks were trading at the largest discount to net asset value (NAV) since March 2007.

The average upstream stock, he says, was trading at a 35% discount to its NAV, using the then-current JPMorgan 2008 price deck of $7.50 gas and $75 oil—and at a 44% discount to NAV using the commodity prices indicated by the Nymex futures market.

The analyst adds that E&P equities have recently fallen significantly relative to the price of oil and gas commodities, reflecting only 56% of the value of their future production based on Nymex futures pricing. Comparatively, those stocks traded at an average 62% of the value of their production during the past year.

“Put another way, the move from (trading at) 69% of NAV in October 2007 to 56% today would be the equivalent of those stocks dropping 19%—with no change in the commodities markets,” he says. “To be back in line with historical levels, those equities would have to move 11% higher given where commodities are today.”

In late January, seven independents—Pioneer Natural Resources, Plains Exploration & Production, Approach Resources, Encore Acquisition, Stone Energy, Swift Energy and Whiting Pet­roleum—traded below the value of their proved reserves using JPMorgan’s 2008 price deck.

“This supports our belief that E&Ps are undervalued and that investors should add here. We have a bullish outlook on 2008 because the commodity-price environment remains one of the best ever while service costs are coming down 10% to 15% and (producers) see improved efficiencies.”

His upstream favorites: Denbury Resources, XTO Energy, Petrohawk Energy, Concho Resources, Penn Virginia, McMoRan Exploration, Goodrich Petroleum and Approach Resources.

Shannon Nome, E&P analyst for Deutsche Bank Securities in Houston, also remains bullish on prospects for the sector. “We’ve recently bumped our 2008 price deck to $75 for oil and $8.50 for gas, up from $60 and $8 respectively, which pushes our group average stock-price-appreciation potential up to 16%.” However, she sees the shares of oil-weighted Continental Resources moving up 31% this year.

Still, should a recession occur in the U.S., could energy stocks slip? J. Marshall Adkins, managing director of energy equity research for Raymond James & Associates in Houston, contends, “We believe the market’s recent negative response—oil prices have dipped about 10% since the start of the year—correlating a slowing U.S. economy with ugly energy fundamentals is simply wrong.”

The U.S. isn’t as important to the global oil market as it used to be. “While the U.S. comprises 30% of total oil demand, it’s more important to recognize that the developing world, particularly China, is the key driver of today’s oil-demand growth.”

Adkins also notes that if a U.S. recession did spill over into the global economy—which would cause worldwide oil demand to decrease for the first time since 1983—OPEC would almost certainly cut oil supplies to protect its ever-increasing price floor, now around $70 per barrel.

But more to the point, the analyst stresses that, historically, energy stocks have outperformed during periods of inflation and oil-price-driven economic slowdowns.

“The only real impact on the oil market from a U.S. recession is if one did not occur, which would cause higher-than-expected demand growth and a subsequently larger-than-expected increase in oil prices.”

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