Reserve replacement and low finding and development costs are the key predictors in determining how an exploration and production company will do in the stock market these days, according to Southwest Securities.

Most would think that production growth would be the best predictor of share price performance. But that simply isn’t the case, said Southwest’s John Gerdes. “Outsized reserve additions combined with superior F&D costs appear to offer the market greater assurance of profitable long-term production growth and consequently provide the forecast explanation of superior share price performance,” he said.

Gerdes cited the four top performing E&P companies: Ultra Petroleum, XTO Energy, Patina Oil & Gas and Quicksilver Resources. Their shares on average have appreciated 716% since the beginning of 2000. The attributes common to all of them include the following: a low-risk onshore exploitation strategy; a predominantly unconventional drilling inventory; and far superior F&D costs and reserve replacement results that translate into superior production growth.

“Specifically, on average for the four top performing E&P companies mentioned above: the natural gas reserve weighting is 79% versus the industry median of 60%; reserve life is 14.6 years versus the industry median of 11.3 years, suggesting a potentially lower production decline rate and significant undeveloped reserves; the average F&D cost is 84 cents/Mcfe versus the industry median of $1.25/Mcfe, indicative of a more productive asset base; and the reserve replacement percentage is 332% versus the industry median of 226%, suggesting a higher probability of sustained profitable production growth,” said Gerdes.

And despite the high relative valuation of some companies. strong reserve additions and operational performance should continue to lead to premium share prices.

©Copyright 2003 Intelligence Press Inc. Allrights reserved. The preceding news report may not be republishedor redistributed, in whole or in part, in any form, without priorwritten consent of Intelligence Press, Inc.