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[Suresh]

Smart Money: The Best Bets in the Oil Patch
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Sure, Big Oil looks cheap, with firms like Chevron trading below the market’s average price/earnings ratio and paying dividends upwards of 3 percent. But many midsize firms are growing faster than the giants, which helps explain why Exxon Mobil is willing to spend $30 billion in stock for shale-gas producer XTO Energy. These midsize players’ stock may offer more potential to pop than the big boys’.
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To find our picks among the lesser-known players, we looked for companies with a competitive edge, trading at reasonable prices relative to their growth prospects.
Petrohawk Energy

La Salle County, Texas, is among the poorest places in the country, a sparsely populated patch of rolling hills with an abundance of scrub brush and grasses. But the region does have one thing going for it: 19 trillion cubic feet of natural gas in the Eagle Ford shale, a rock formation around 11,000 feet below the surface. Petrohawk (HK: 26.36, +0.33, +1.26%) announced the first major discovery in Eagle Ford in 2008 and has drilled 20 wells there—with 50 to 60 more planned for this year. The geology of the formation makes for relatively easy drilling, with costs as low as $5 million per well, half that of other shale fields. And companies in Eagle Ford can break even with gas prices at just $3.88 per million British thermal units, compared to $5 in other areas. “The economics are very compelling down there,” says Petrohawk CEO Floyd Wilson.

That could be a big advantage for Petrohawk. The firm specializes in horizontal shale drilling—a technique that’s opening up vast deposits of natural gas. Petrohawk expanded production by about 75 percent in 2009 and plans another 43 percent increase this year. Its costs are about 20 percent below the industry average, and it has built a reputation for smart land acquisitions, enabling it to profit even with gas prices near rock-bottom lows.
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Consol Energy
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Consol’s low production costs allowed it to remain solidly profitable even as the downturn sapped demand for its main product. Some analysts say Consol—the largest coal producer east of the Mississippi—is poised to do even better in the years ahead.

Consol is in a good position to benefit from economic recovery, with some of the oomph coming from customers in coal-hungry countries like China and India. Consol, based in Canonsburg, Pa., sends about 10 percent of its production abroad....

Consol CEO Brett Harvey tells SmartMoney that much of the company’s growth will come from its 81.5 percent stake in CNX Gas, which gives it exposure to the Marcellus Shale, a promising natural gas reserve that stretches across several Appalachian mountain states. CNX also is one of the region’s lower-cost producers.
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FMC Technologies

FMC ... [is] the dominant maker of subsea “trees”—complex networks of valves used to control the flow of oil and gas from ocean basins to rigs, pipelines and ships.
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FMC’s backlog of orders has been flat lately, at around $3 billion. But the company expects orders to pick up in 2010 and has identified more than a dozen projects during the next 15 months that could each bring in over $150 million in revenue. It’s also capitalizing on a trend to move more production from offshore platforms to the seabed, says Robert MacKenzie, head of energy research at FBR Capital Markets. FMC has a fast-growing business selling systems to separate sand, gas and fluids on the ocean floor, which is more economical than separating them on a surface platform. The company also makes pumping and boosting systems that allow producers to extend an oil field’s lifespan.

While FMC has 37 percent of the tree market, it faces fierce competition from Cameron International, which has been gaining market share.
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Pride International
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Already one of the world’s largest drillers with a fleet of 21 rigs, Pride is spending $3 billion for four new ships that can drill wells up to 30,000 feet below the ocean floor—the new deepwater frontier. Three of those ships are booked for five years, at rates averaging more than $500,000 a day. And with its new fleet, Pride will be more dependent on deepwater projects than any other U.S. driller, booking 60 percent of revenue this year in the segment.
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Plains All American Pipeline

Given the wild swings in oil prices, few would mistake energy for a predictable industry. But one corner of the business provides a semblance of stability—pipeline operators structured as master limited partnerships, or MLPs. Partnerships like Plains All American Pipeline (PAA: 53.51, +0.12, +0.22%) typically make money through long-term contracts based on how much oil or gas they move, not its cost. “They are effectively a tollbooth operator,” says James Shelton, chief investment officer at advisory firm Kanaly Trust, which holds Plains in some client accounts.

MLPs must pay out the bulk of their profits through distributions—their version of dividends. That means income-hungry investors can grab attractive yields, about 7 percent in the case of Plains. Although MLPs require additional paperwork at tax time, they come with an attractive perk: Investors don’t pay taxes on about 80 percent of the income until they sell.
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Suresh

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