Following five years of mediocre growth, E&P companies are finally showing signs of increased capital growth and ramped-up spending, an improvement from the chronic underinvestment and slow production that characterized the industry in previous years.

According to Raymond James & Associates Analyst Pavel Molchanov, E&P capital budgets have increased to date in 2010, with the majors guiding production growth of between 2% and 4%.

“I think in general those numbers tend to be on the aggressive side,” said Molchanov, who points out that investors remain skeptical of these far-reaching growth projections. “But at least these companies are taking the right steps to get some growth, and hopefully that will translate into a better multiple as a result.”

Two additional trends Molchanov observes in the E&P industry are a resurgence of interest in North America, in the realm of shale plays, deepwater drilling and joint ventures, such as BP (BP)-Chesapeake (CHK) in the Fayetteville Shale, and greater frontier exploration in geographies with no current oil production.

“Certainly there are opportunities in more established areas, like Brazil, Australia and Angola, but frontier exploration is definitely a trend that we’re seeing accelerate,” Molchanov said. “Ghana, in West Africa, is a good example. We’ve seen Western companies and the Chinese fighting over a multibillion-barrel field there.”

As thousands of gallons of oil continue to spew from Deepwater Horizon into the Gulf of Mexico, industry analysts turn their attention to regulatory tightening and a pullback in domestic drilling.

If regulations increase, the costs of exploring and drilling will most likely rise, Faisel Khan of Citigroup Investment Research & Analysis says. After surveying about 400 companies worldwide, Citi’s research team found that E&P costs already increased — exponentially — over the past five years.

“From 2000 to 2004, we saw finding and development, F&D, costs rise from $4 to $6 per barrel. By 2008 we saw those costs rise to $18 per barrel. This is massive cost inflation,” Khan said. “In order for companies to meet their cost of capital at $18 per barrel in F&D costs, we need an $80 oil price. So far these costs have been flattening out. A higher level of regulation could add to that.”

Although companies such as BP (BP) are self-insured, increased costs could swallow smaller, insured E&P companies.

“To some degree, it might give the super majors more of a competitive advantage when it comes to drilling offshore in these deeper horizons because the costs are so high and the risks are so high that essentially someone with a massive balance sheet becomes the only party that can drill and produce in such extreme conditions,” Khan said.

While the industry sorts out possible regulatory hurdles, the extension of the offshore drilling moratorium adds to the unknowns.

“The BP incident really puts a logjam in that whole [legislative] process,” Khan said. “There’s no doubt that any sort of comprehensive energy legislation that we see come out of Congress will not be as constructive as we thought. California and Florida have already pulled back from the table.”

In an exclusive interview with The Wall Street Transcript, Kinder Morgan Energy Partners President C. Park Shaper discusses KMP’s current focus on U.S. domestic oil production in an effort to capitalize on current trends.

“The country has a desire to be more energy independent and oil prices have gone up over the last five years, which has made domestic oil production more valuable. We’re taking advantage of that in our CO2 segment,” said Shaper, adding that KMP has largely hedged prices in this segment for the last several years. “This trend means that not only is our own oil production more valuable, but also the CO2 that we sell to third parties for enhanced oil recovery is more valuable.”

With oil prices hovering $70-$80, Kinder Morgan is not the only energy company looking to capitalize on domestic oil production, although they may be one of the better-situated industry names. To date the company has grown its enterprise value from $325 million in 1997 to currently approximately $30 billion.

“There’s a whole series of additional trends that we’re looking at, and by no means do we capitalize on all of them, but we try to understand what those developments are going to be, what the implications are and if we see there is a way for us to participate in a cost-effective manner,” Shaper said.