Encore, Berry Petroleum, Cimarex: Upside For Those Who Wait

Buy-recommended small cap producers Encore Acquisition (EAC), Cimarex (XEC) and Berry Petroleum (BRY) are among our best U.S. ideas for appreciation considering the commodity outlook, equity valuation and a catalyst to spur new interest.

The quote for six-year oil remains above the long-term expectation of $60 a barrel in our current valuation analysis. After declining in price since last winter, natural gas has been advancing relative to oil since the summer and now the new winter season is about to begin.

McDep Ratios at 0.56 for EAC and 0.57 for XEC, the lowest in our coverage, imply that those stocks are priced for the unlikely case that oil would be less than $40 a barrel. A possible catalyst for investors may be developing as buy-recommended peer Energy Partners (EPL) trades at a McDep Ratio of 0.85 in anticipation of an improved takeover offer perhaps up to a McDep Ratio of 1.0.

In the past, greater price volatility in the small producer stocks has meant more downside. However, it may mean more upside looking ahead for patient, contrarian investors.

[Editor's note: This article was first published on October 31st.]