Day and Rhodes - Oil and Gas

05/16/2003 12:00 am EST


Adrian Day

Chairman and CEO, Adrian Day Asset Management

"We believe the gas market in particular is very tight, with lackluster exploration results," says Adrian Day leading expert in  natural resources. "We own several oil & gas stocks; all are well-managed companies with high potential, which can certainly be purchased by investors with little exposure to the sector."  Meanwhile, Richard Rhodes is attracted to an oil driller from a technical standpoint.

"Devon Energy (DVN ASE) has grown over the years largely by acquisition. Its latest purchase, of Ocean Energy, is now completed, making the new Devon the largest US independent oil and gas producer. Devon Energy reported its first quarter results, achieving record production and earnings, with cash flow more than doubling. Debt is coming down considerably and the firm plans to reduce debt even more in coming years. Further, Devon now has an extensive exploration and development program, from projects it has acquired in recent transactions, and this will provide the platform for growth going forward. With a reasonable balance sheet and significant near-term and longer-term exploration projects, as well as cash flow leverage amply demonstrated by recent results, Devon remains a top energy pick, all the more so, since its valuations are among the lowest in the industry. We don’t rule out another acquisition, though it’s no longer essential for continued strong growth; eventually, we believe Devon will be acquired by a global major. Buy on weakness."

Meanwhile, Richard Rhodes, editor of The Rhodes Report, is a fan of Diamond Offshore (DO NYSE), which specializes in deep water drilling, "Our interest here is that important intermediate-term bottom may have formed, or is in the process of doing so, and therefore the probability of future higher prices in the not-too-distant future is increasing. Our initial target would become the November 2002 highs at $24, with a later projection to upwards of $25-$26. Prices have continued to trade higher, breaking above the 50-day moving average. Additionally, we find the 20-day moving average has turned higher in ‘positive divergence’. In essence, this is a very bullish pattern, and one that marked the low in October 2002. And on another final and positive note, a short-term declining trendline has been broken, which again tends to confirm our initial viewpoint that long positions are warranted at current levels. Therefore, having said this, we shall act upon our belief a low has formed, and we shall add a long position to our portfolio on a rally through $20.15, and we shall allow the order to remain open until we cancel. Our risk in the trade is initially to $17."

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