Domestic exploration and production (E&P) companies often spend too much money and in turn deplete company value by chasing growth, acreage and reserves when they instead should focus on efficiency, returns and margins, the energy team at Tudor, Pickering, Holt & Co. Inc. (TPH) said Tuesday.

The "TPH E&P Manifesto," a 36-page review of E&Ps compiled by analysts David Heikkinen, Brian Lively, Jessica Chipman and Brad Pattarozzi, examines historical stock performance and why some companies continue to outperform others. The review is to be used as a revised methodology that TPH analysts will use to rank their coverage universe.

E&P target prices are based on net asset values (NAV), "but we realize we cannot solely use NAV in a vacuum as it does not always accurately capture a company's ability to create the most value per dollar invested and generate the best returns possible," said Heikkinen and his team.

Instead, E&Ps should be ranked based on how much value they create, return on capital employed, cash margins and through production growth/debt-adjusted shares, the analysts wrote.

"E&P investors can provide the checks and balances by focusing on returns and allowing growth to be the outcome. Every project that is available, every lease that can be had, every well that can be drilled need not be funded."

In a "flattish gas and oil price environment," better stock performance requires improving cash margins, investing in higher value targets and "smart" production growth, according to TPH.

"We tend to be agnostic regarding oil or natural gas exposure and are focused on what companies can create the most value," said the TPH foursome. "But with $4/Mcf gas and $90/bbl oil, 2011 looks tough for pure gas companies."

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