Merrill Lynch's E&P analyst John Herrlin has reduced his rating to Neutral from Buy on Canadian Natural Resources, EnCana Corp., Energy Partners Ltd. and Newfield Exploration Co. "Why now? There could be multiple types of commodity-price risk in 2005 to reduce netbacks at the wellhead," he says. He expects natural gas prices will wane in 2005 and oil prices will wax. On some measures, "the stocks aren't expensive versus the market." However, they are pricey at $41 oil and $5.75 gas. "Does this mean that we are bearish on any of those companies' longer-term prospects or the sector? No. We are concerned about the intermediate term after strong outperformance, and see nothing wrong with taking some profits." He adds that this could change if investors flock to energy stocks anyway, North American gas prices are better than his $5.75 forecast, M&A among publicly held companies spurs speculative valuations, basis differentials narrow meaningfully for North American gas or light/heavy oil and/or more investors discover energy. As for Canadian Natural, EnCana, Energy Partners and Newfield, "the stocks could go up or down another 10%...over the next 12 months, and that is fine," he says. "However, last year, many of them rose more than 30%. At this stage, we think it's time to pause, or take a time out." Overall, "we continue to believe that investors should be Overweight the energy sector," he says. However, he isn't optimistic about independents' potential for growth in earnings. Upstream operating margins may have peaked, and the industry has run out of good or inexpensive assets to buy, he says. "We've been known to say that the Street rents, and doesn't own E&P or other beta energy stocks...Is there a danger of E&P stocks becoming portfolio accessories or attire?" -Petroleum Finance Week