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Raymond James: 'Robust' Prices Sustainable

With a bullish long-term price deck of $70/bbl for crude oil and $10/Mcf for natural gas -- and a 2% price inflator after 2007 -- investors should expect "solid stock price performance" for the "entire energy complex," including exploration and production (E&P) companies, said Raymond James in its latest "Stat of the Week."

Analysts J. Marshall Adkins and Wayne Andrews said they "continue to believe that robust oil and gas prices will be sustainable for the foreseeable future," which will translate into strong gains for well-performing E&Ps. Investors "increasingly focus on companies that exhibit strong cost-management ability, helping them generate better-than-average growth in earnings and free cash flow."

Production growth per debt-adjusted share remains important, they wrote, but investors also place increasing emphasis on earnings-per-share (EPS) growth and free cash flow yield. " There also is an "increase in investor concerns about escalating oil service costs for E&P companies. As costs have gone up, the market seems to be focusing more on E&P profitability -- as exemplified by EPS growth and free cash flow -- than it has historically. Looking forward, we expect that investors will place a premium on E&P companies that combine effective cost management and organic production growth."

Based on their research, Adkins and Andrews pegged their top 10 E&P stock pics, which include four large caps: Chesapeake Energy, Occidental Petroleum, Ultra Petroleum and XTO Energy, and six mid/small caps: Bois d'Arc Energy, CNX Gas, Comstock Resources, Energy Partners, Range Resources and Western Gas Resources.

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