Prudential Equity Group has raised natural gas and oil price forecasts for this year and through 2005, and analysts also expressed enthusiasm for exploration and production companies in a new report. Merrill Lynch also warmed to integrated oil and natural gas producers, noting that the rally in commodity prices should encourage long-term investments.

“Shares have rallied with oil prices, but we still see upside,” Merrill analysts said in a new report. “We believe in long-cycle investing and view the integrated group as being an ideal investment sector in the current stock market.” Analysts also assume “that there won’t be a meaningful economic slowdown to curtail oil and natural gas demand.”

Merrill analysts said the integrated energy companies should have “another 10% upside in terms of stock price appreciation and dividends,” but admit that “much of the ‘easy money’ was already made.”

Prudential raised its 2004 and 2005 price forecasts along with earnings per share (EPS) estimates for producers. The 2004 gas price forecast was lifted to $5.90/Mcf from $5.75, and the 2005 estimate is now at $6 from $5. The oil price forecast for 2004 is now $41/bbl, up from $36, and for 2005, oil is now priced at $35/bbl, up from $28.

Analysts at Prudential also raised 2004 EPS estimates for exploration and production (E&P) companies by 11% and raised estimates for 2005 by 48%. It also raised estimates for integrated producers by 25%. The stock outlook for the E&P sector remains “neutral,” because the “moderate improvements in the macro environment have been accompanied by share-price appreciation, and valuation parameters are now only moderately favorable.”

Prudential rated three independents at “overweight”: XTO Energy Corp., Occidental Petroleum Corp. and Devon Energy Corp.

At Tulsa-based Devon, “significant free cash flow is translating into demonstrable balance sheet improvements,” and analysts also expect to see aggressive stock buybacks in the future. Occidental, said analysts, “delivers the lowest finding, development and acquisition costs in the sector,” translating “into further profit advantages in the future.” Fort Worth-based XTO “has drilling inventory that we believe, will be able to sustain more than 10% organic growth for the next four years,” along with “superior finding and development cost performance.”

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