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TWST: It’s a time to be cautious in your analysis.

Mr. Gillon: I think that’s the case in all E&Ps, regardless of where they trade. We don’t know precisely what OPEC will do with future production levels, but there are certainly reasons to infer from their announcements that more oil will be put on the market and that, if they have a target, they would rather see the price somewhat lower than it is now. We believe that the North American natural gas supply is going to be very tight. But prices are at levels that we’ve never seen before, at least since the industry has been deregulated. If demand growth were to falter, we could see natural gas prices come down sharply, especially if crude prices were dropping at the same time.

TWST: What are the other challenges unique to the Canadian scene that the companies face?

Mr. Gillon: It may be that the biggest challenge producers face is also one of the biggest advantages that they have. Because nearly all of the mineral rights are owned by the provinces, there is ready access to geological information. As a result, producers are working with a good knowledge of the geology of their operating areas. That allows them to make more sensible decisions on where to acquire land and drill wells. But that same access to a common information base makes leasing prospective acreage extremely competitive. So acquiring the leases and the seismic before drilling can be more expensive in Canada than in other areas.

TWST: Are there any other issues that you think investors should be aware of regarding the Canadian E&P sector?

Mr. Gillon: There are no pending political developments we are aware of that should cause anyone to worry. The broader movements of the last several years have generally been toward opening of markets and fiscal conservatism. If anything, an investor should now be more comfortable putting money in Canada.

TWST: What kind of structure do you see for the industry going forward? Will we see much change in two or three years?

Mr. Gillon: This is an industry that has been consolidating for 100 years, a trend we expect to continue. At the same time, new companies are constantly being started. Often, the new ventures are founded by seasoned professionals who previously enjoyed substantial success. For a few years, rapid growth is still possible from a small base in Canada, and some of these start-ups will become the next crop of mid-sized producers. Technological changes will also continue, but we don’t see any breakthrough developments on the horizon.

TWST: You’re cautious about the global E&P sector. Are there any suggestions for an investor’s watch list in addition to some of your recommendations?

Mr. Gillon: One company that could hold some pleasant surprises for investors is PanCanadian Petroleum (Toronto:PCP.TO). The railroad has said that it is exploring whether it wants to continue owning its hotels, its oil company, or even its railroad. So it might be separated, or it might be 20 years before that happens. Besides the fact that PanCanadian is undervalued and one of the largest producers in the world, the reason to be interested is that they have what appears to be a substantial gas discovery offshore of Nova Scotia. The current find could approximately double their natural gas reserves. Numerous people think that this is an emerging petroleum province. If it works out, PanCanadian could increase its asset value severalfold in the next three to five years. We certainly see this as a better than average company selling at a discount to the group.