Exploration and production (E&P) companies take different routes in their drive to add value, and their road maps may follow mergers and acquisitions, organic growth, diversification or a simple focus on one region. However, what sets the winners apart is how well they execute their strategies and how quickly they evolve when times change, a John S. Herold equity analyst said Thursday.

Herold analyst Daniel Pratt presided over a conference call Thursday to discuss “Top E&P Value Creators,” a report that also lists its highest rated undervalued picks for 2006. Herold’s research focused on producers’ appraised net worth (ANW) growth.

“There are many paths to success, but a few common themes for long-term prosperity,” Pratt said. Often he is asked what sets a successful producer apart in the crowd. But the answer is not so simple.

“What’s the best way?” he asked. “We’ve seen companies add value with a number of strategies. Execution is what they have in common.” The most successful companies, he said, are not afraid to allow their strategies to evolve — but as they change, the execution remains key. All are focused on growth, but what the best E&Ps do is focus on profitable growth, that is, finding new reserves and holding down development costs.

“Sound strategies take advantage of fundamental strengths and the asset base,” Pratt said. “You need management able to shift gears.”

XTO Energy Inc. tops Herold’s Large E&P picks. The Fort Worth-based independent is an “aggressive acquirer” that exploits its strategy, he said. “It made an early and timely commitment to gas, and it has low-cost organic growth. This is a well balanced growth company, adding value with the drillbit.” Herold’s other top large E&Ps for 2006 include Chesapeake Energy Inc., with a “massive gas position,” Canadian Natural Resources, Apache Corp., EOG Resources Inc., Newfield Exploration Co., Patina Oil & Gas Co. (which is being acquired by Noble Energy), and Pogo Producing Co.

Herold’s highest rated “undervalued” E&Ps include Cimarex Energy, which is merging with Magnum Hunter Resources Inc. Cimarex, he said, reports reserves that are typically 99% proved developed, which infers a lower replacement cost. Other undervalued picks for this year include Noble Energy (Patina’s buyer), Remington Oil & Gas (which is being acquired by Cal Dive International), Compton Petroleum, Houston Exploration Co. Santos Ltd. and PTT E&P Public Co. Ltd.

The report is available for download at www.herold.com.

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