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Four analysts and two experts examine the oil & gas sector in this special 29-page Oil & Gas: Exploration & Production issue from The Wall Street Transcript, available at (212/952-7433) or http://www.twst.com/info/info542.htm

TWST: Shannon, let’s begin with you today. What is it exactly that an E&P company does?

Ms. Nome: A definition? An E&P company is an oil and gas producer. We’re not talking about a company that owns drilling equipment. E&P companies lease acreage; they drill wells using leased rigs and other equipment; and they produce oil and gas from the wells they discover — that’s their primary revenue and cash flow source. So we’re talking about oil and gas production, or the so-called “upstream” side of the business.

TWST: Shannon, do the stocks have more upside after the recent moves, or will it slow down for a while?

Ms. Nome: I happen to think the near-term upside from here is somewhat limited. Our framework attempts to quantify how E&P share valuations compare to the prevailing futures market implication for oil and gas prices. On that basis, the stocks appear roughly 10%-12% overvalued vis-à-vis the current blended oil and gas price strip. I’d note, in fact, that the stocks have actually looked somewhat expensive on this basis since the end of last October, and yet the stocks moved up anyway, simply in response to the surprising recent strength in oil and gas prices. Funds flows and a general lack of good apparent opportunities in other market sectors have played key roles too. So based on relatively full valuations, we think that further appreciation in the stocks will be reliant on ongoing momentum in the commodities — a tough bet from current levels roughly 15% higher than five-year average oil and gas prices. In short, I’ve found that what really drives these stocks is commodity price surprise, as opposed to high commodity prices in absolute. It seems to me the direction of the “next surprise” in a market that seems to be looking for nothing but good news will be to the downside. We think the best time to broadly overweight the group is when market expectations are beaten down, so we think better opportunities to broadly buy this group will present themselves at some point later this year. Longer-term appreciation potential from here may be decent for patient investors, but I suspect the next move will be down.

TWST: Shannon, you also cover Apache (NYSE:APA). Do you share Andrew’s enthusiasm? What are your top picks?

Ms. Nome: I absolutely agree with Andrew on Apache. In fact, it has been one of our top two picks for some time, along with Ocean. Frankly, most of our preferred names in recent times have been the more oil-exposed companies, given our constructive view on prices vis-à-vis consensus. As Andrew said, first and foremost I find Apache’s management to be very disciplined. The company’s net debt to total cap was about 36% at year-end 2001. The group average was some 10 percentage points above that, as a lot of companies have levered up based on acquisitions made at high prices over the past 12 months. So it would seem the company has the ability to move on something in this environment if they find the right asset to buy. But importantly, I don’t expect them to buy just because they have the dry powder to do so. I would also add that Apache is underappreciated for its exploration exposure. While some would argue they don’t offer that classic “home run” exploration potential that investors look for, I would simply point out that if you combine enough bunts, singles and doubles, then you have the makings of a home run without the risk profile. Australia, Egypt and Canada would be good examples of Apache’s exploration success story. And they do, in fact, offer big-ticket potential in the deeper waters of the Mediterranean Sea, off the coast of Egypt. There at their “West Med” project, they have some wells planned over the next year that could be company-makers, in terms of multi-Tcf gas exposure. To boot, we find Apache to be very reasonably valued to its peers. On my 2003 numbers, they trade at 4.6 times EBITDAX, against a peer average of 5.3.

This special issue includes:

1) Oil & Gas: Exploration & Production - In an in-depth (12,300 words) Analyst Roundtable, M. Bradley Davis, Senior Vice President at SWS Securities, John P. Herrlin Jr., First Vice President at Merrill Lynch Global Securities, Andrew T. Lees, Vice President at Stifel, Nicolaus & Company, Inc. and Shannon Nome, Managing Director at J.P. Morgan Chase, examine the outlook for the sector including stock performance, industry definition and share specific stock recommendations.

2) Energy Industry Trends & Issues - In an in-depth (3,300 words) Expert Interview, Gregory B. Barnett, Founder and President of EnerCom, Inc., examines the outlook for the sector.

3) Energy Industry Trends & Challenges - In an in-depth (2,700 words) Expert Interview, Howard A. Christensen, co-Chairman of Christensen & Associates, examines the outlook for the sector.