For Subscribers

Get the complete article now!

TWST: Why don’t we start with what’s happened in the last six months to the oil and gas E&P companies. Then we will discuss the coal mining stocks in your coverage.

Mr. Khani: In the last six months we’ve seen a decline and then a rise in oil and gas prices. We’ve seen winter weather evolve, causing natural gas prices to rise significantly and inventory levels to decline well below average. As a result, our oil and gas E&P coverage universe has risen approximately 15%-20% since the beginning of December.

TWST: What is the outlook for imports and exports? Canadian imports have been declining, and exports have been increasing to Mexico. What is the story there?

Mr. Khani: The imports come in two forms. One is Canadian and the second is liquefied natural gas (LNG). Canada and LNG now represent about 15% and 2% of US consumption, respectively. Last May, we hosted a Canadian investor tour and met with about 10 oil and natural gas producers. We came away with the feeling that natural gas supply will be challenged to grow over the next couple of years as the Canadian asset base has become very mature, and what had been a growing use of our supply (consumption) is now flattening out or declining. We’re seeing renewed interest in LNG, even Mr. Greenspan has jumped into the scene; however, it will take three to five years before new LNG import terminals are constructed. We also attended the Natural Gas Summit hosted by Energy Secretary Spencer Abraham. The goal was to look for short-term solutions to alleviate the impending natural gas crisis. The focus was on conservation options, open access to restricted drilling areas, forced shut down of inefficient gas power generation, and possible emission hiatus on NOx and SOx restrictions. From our perspective, there were few short-term options discussed to materially alleviate the crisis. On the export side, Mexico right now is essentially consuming the 2% LNG import. They are building gas-fired generation similar to what we have been doing for the last several years, and they have not stepped up their domestic drilling for natural gas. As a result, they’re relying more and more on us for their source and putting more pressure on our supply.

TWST: I see you have an outperform on Devon Energy.

Mr. Khani: I do. Devon (AMEX:DVN) has been a company that really was more focused on acquisition, yet it’s making a transition into becoming somewhat more of an exploration company with the last several acquisitions it has made, including Ocean Energy. We think the stock is undervalued. Basically, it’s trading significantly higher off its lows, but really only a little bit higher than the same levels it was at before it made the last few acquisitions, all of which we thought were very successful. So we see this stock also having a chance to go back into the high $60s.

TWST: Do you have any words of advice for investors who are looking at these sectors for investment?

Mr. Khani: I would say, in general, look for a pullback to buy these stocks. Also, when you start to see some of the lower quality companies rise up, that’s a good signal that there’s euphoria in the market and that’s not a time to buy but a time to sell.