Value investors were out in force at this year's Howard Weil energy conference in New Orleans, joined by what seemed like a blizzard of momentum players determined to learn more about a market clearly in vogue. "There were many more new faces kicking the tires, trying to get up to speed on the hot E&P sector and the laggard oil-service sector," says one New York-based portfolio manager. Indeed, upstream presenters typically played to a full house during each session-an attendance level normally seen only at service-sector presentations in prior years. "The buyside is gravitating much more toward E&P companies today because, in terms of operating, financial and stock-price performance, they've been able to benefit far more from recent high commodity prices than service companies-a group that really hasn't been able to exert pricing power yet," says G. Bryan Dutt, president of Bellaire, Texas-based Ironman Energy Capital LP. Nevertheless, service companies-precisely because of the recent flagging performance of their stocks and the high beta or volatility of their share prices-drew large numbers of bottom-fishing, value investors who got some encouraging news. "BJ Services announced that it's beginning to see some nice price increases in its pressure-pumping business," says Dan Rice, senior vice president and portfolio manager for State Street Research & Management Co., Boston. "Also, the land drillers indicated their level of inquiry [from operators] was getting very strong, which means pricing power is just around the corner for them. "Thus, instead of witnessing only $100 in gains in monthly margins, they could be looking at $300 to $400." He adds that Nabors Industries, Patterson-UTI Energy, Grey Wolf and Pioneer Drilling would all be beneficiaries of this outlook. While recovery in the offshore drilling market isn't likely until second-half 2004, Dutt says there's a lot of excitement about premium jackup companies like Rowan Cos. because of the large number of deep-shelf Gulf of Mexico wells yet to be drilled and the increasing tightness in that market. On the E&P side, Rice says the Plains Exploration & Production story of oil reserve and production growth in California "is as good or better than any I've heard in the industry." He also likes the "enormous" amount of drilling opportunities Tom Brown has on its plate. (EnCana Corp. does too. A press time, it was offering Tom Brown shareholders US$1.95 per proved barrel of oil equivalent.) The New York portfolio manager agrees that Plains head Jim Flores is "a money-maker." The analyst also lauds the niche focus of Tom Brown in the Rockies, XTO Energy in the Barnett Shale in East Texas, and Evergreen Resources in the Raton Basin, Colorado, coalbed-methane play. "These are low-cost producers with significant years of drilling inventory in their portfolios," Rice says. They should continue to benefit from high commodity prices and increased production that they can bring on at all-in costs of around $1 per thousand cubic feet (Mcf), he adds. One theme emerging from all the E&P stories presented at the conference is that future growth for most domestic producers will be very much tied to tapping unconventional resources such as tight-sand gas and coalbed-methane plays, says Rice. "Production from conventional gas plays is already in sharp decline." More compelling to the analyst, however, were the presentations by coal companies during the conference's final session. "What came across was that coal is now a seller's market-not the buyer's market it has been for nearly the past 20 years...This industry is now entering the same sort of long-term upturn the gas industry entered in 2000." Still, most buysiders scurrying in and out of the four days of presentations were focused on how to take advantage of the brave new world of $30-plus oil and $5-plus gas prices that most Street analysts believe are the new norm. "Investors believe there's a long-term, secular hydrocarbon supply problem in North America, particularly as natural gas production continues to decline in the face of increasing demand," says Dutt. "So even if they're generalists, they want to have some kind of exposure to the long-term bull market for oil and gas prices-some hedge in their portfolios."