Chieftain has built one of the top 10 exploration portfolios on the Gulf of Mexico Outer Continental Shelf, despite a relatively small capitalization, says Greg L. McMichael, senior oil and gas analyst for A.G. Edwards & Sons Inc. in Denver. "We have a Buy on the stock and an 18-month price objective of $28 per share." Edmonton, Alberta-based Chieftain International is a small-cap E&P company that operates predominantly offshore in the Gulf of Mexico, principally on the Outer Continental Shelf where it owns interests in 129 lease blocks-48 of which are held by production and 81 of which are exploration acreage. To a lesser degree, CID is also involved in the deepwater Gulf of Mexico, where it owns various interests in 10 blocks. The company also explores onshore the Gulf Coast and has production and development activities in Utah and the North Sea. At year-end 1999, the company had proved reserves of 239.9 Bcfe. "Chieftain has raised its exploration success rates on the Gulf of Mexico Shelf, from roughly 45% during the 1996-98 period to about 69% in 1999," says McMichael. "This success rate has been achieved partly through the application of recent advances in 3-D seismic processing and interpretation, and partly through increased operating control on the company's properties." Higher exploration success rates led to lower finding and development costs in 1999-roughly $1.05 per Mcfe-as well as increased returns on invested capital, he says. And his analysis of CID's operations indicates the company is continuing to generate attractive returns on capital. Says McMichael, "Chieftain's risk-adjusted, prospect-level economics on the Shelf are compelling even at the low end of our reserves and pricing assumptions. For instance, assuming only $2 gas, $18 oil, and only 10 Bcfe of gross recoverable reserves, the company's Gulf of Mexico exploration program generates an internal rate of return of 26%." Given the diversity and quality of the company's exploration portfolio, and its commitment to advanced technology, the analyst believes that Chieftain's recent results are repeatable. "Based on our 2000 earnings and cash flow forecast, the company's attractive returns in the Gulf of Mexico, and a very conservative balance sheet, CID's valuation should move up relative to its peers," says McMichael. For 2000, Chieftain's capital budget is $86 million-an increase of about 55% from 1999. This includes $32 million for exploration, $42 million for development, and $12 million for land and seismic. "Based on our 2000 cash flow projection of about $79 million, the company should be able to fund roughly 92% of this spending from cash flow," the analyst says. The balance would be funded from the company's commercial bank facility, which is about $100 million. Note: Analysis took place 2-10-00 when CID closed at $17.25 per share and was reaffirmed 2-24 when at $13.75. Currently, some 16.2 million shares are outstanding. The recent 52-week price range was $22.75-$9.56.