Lehman Brothers on Thursday boosted its outlook on the oil and gas sector, raised its forecast for several individual energy stocks and increased its price predictions for both oil and gas through 2005.

In a research note, analyst Thomas Driscoll attributed the changes to continued increases in demand forecasts, bullish storage numbers, a weak U.S. dollar, adequate OPEC production discipline and rising costs. The 2004 gas forecast was raised 25 cents to $5.24/MMBtu, and the 2005 forecast was raised by 50 cents to $4.75. Oil prices were raised to $32/bbl from $30 this year and to $28/bbl from $23 in 2005.

The Lehman analyst also raised the energy sector rating to “positive” from “neutral,” and boosted oil and company earnings forecasts across the board. Driscoll’s top sector picks were Burlington Resources Inc., Talisman Energy and XTO Energy. He also upgraded Canadian Natural Resources, Kerr-McGee, Nexen and Unocal to “equal weight” from “underweight.”

“We would be more aggressive on recommending the purchase of exploration & production shares if the companies had a better record of focusing on earning returns for investors,” Driscoll wrote. “Finding and development costs have risen sharply over the past several years and we fear that a large portion of the high cash flows will be used, in part, to fund the drilling of marginal oil and gas prospects.”

Driscoll added that companies that spend cash “wisely” by using excess cash flow to reduce debt or repurchase shares will likely continue to outperform the more aggressive spenders.

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