St. Mary Land & Exploration Co. (SM)

Although I am based out of Oklahoma, I traverse TX, NM, and Louisiana regularly. I've worked with oil and gas companies quite a bit. I think that a lot of analysts give them too much credit, operation wise. They are not all he most business savvy folks around, and tend to be greedy and indifferent to shareholders.

I'm not excited about the sector, and haven't been for a year or so. But, everyone needs energy in their portfolio because, from an investing standpoint, very few sectors can offer investors an industry which is virtually guarantee growth and profits over the next 5-7 years.

We all have to just stick to the old rule of allocating %15-20 of their portfolio to "old" energy (oil/gas). Pick your companies for the long term. Look at quality of management, not hype, or explosive quarters. These companies are notorious for cooking the books. Here in Oklahoma, we scratch our heads when we see these companies hyped on TV and traded as momentum plays. Veterans of the industry know who the good guys are, and who the question marks are. This is key in this industry, b/c for the most part, trust me, these guys don't give a damn about shareholders.

I don't know the current prices of the companies I am about to mention, but I know that they are companies I will be looking at when the time is right to put real money down. The companies I like are ones that oil execs out here own in their own portfolios. They are ones run by trusted friends and competitors. The ones I question are ones that these same veterans avoid in their personal porfolios.

St. Mary's is respected and overlooked. They are respected in the oil patch. Dawson (DWSN) is good people. A bit overpriced, but run by honest people. With all due respect, Hidden Gems writeups seem to not quite fully understand the way the business truly works in its entirety, but it is a hidden gem, and unlike exploration companies, your typical stock analysis is better at determining value of seismic companies than the explorers and drillers. Another good company owned by people in the business is Weatherford. However, wait for better prices. Apache is a good outfit as well. Again, entry point is the only issue.

Now, how traditional stock analysis often misses in this sector. Chesapeake...is the darling of the media, but the aforementioned veterans won't own it. They spend money they don't have. They are not shrewd in acquisitions and mineral leasing. Too much hype.

Devon is a better company, hands down. But until recently, they haven't got the press. LIkewise, people drooled over Sandridge. I mean, it was a quasi "spinoff" of the darling Chesapeake. That formula usually pays off in tech, retail, and other sectors. But everyone here avoided Sandridge like the plague. This is a slow industry. Successful companies today are doing well b/c of decisions made 10-20 years ago.

And my final example......EPL (Energy Partners). Morningstar had 'em at a five stars. Cramer said it was the best buy in the history of his show in early 2006. It was a trainwreck. P/E ratios don't mean much, when you have idiots running the company. The days of wildcatting are gone. Thanks to improved seismic techniques, we know where most of the oil and gas is. The next question becomes, how to get it, and how to do it cost effeciently.

I'll quit rambling. Bottom line is that there are no quick riches for stockholders in these companies (even though the companies are making tons of scratch). I use a Buffet like approach. Buy quality, and get in low and for the long term. 25 year old analysts don't understand the industry. I've hated seeing people lose their shirts on sandridge and chesapeake. And cramer's EPL call was criminal. I'm basically an idiot, but I live in the heart of this industry. The executives I seek advice from are no clowns. One just sold a small portion of his own company for $55million. He's known many of the leaders of the aforementioned companies, like Mr. Dawson, for 30 years. He said it to me best......buy quality. View these quality companies as essential, buy moderate portions of your portfolio. And view them as 10 year investments....much like corporate bonds that have the chance to return %12-15 over the long term. Also, there will be minor bubbles bursting, but we are on a long term trend. It was apparent out here as early as 2002 that an infusion of $$ was flooding the plains. Just like there is currently a pullback and further plans for rig reductions in 2009. You need to own oil and natural gas. Be willing to pay up a little bit for quality. But don't expect riches.