From the lows of January 5 this year to the highs of February 28, the stocks of major oils were up 27%, and E&P and service stocks were both up 23%-clearly a great run for the bulls in the energy sector. But surprise-the bulls may not be through running. So says Jefferson G. Parker, who last October became president of Howard Weil, the New Orleans energy-focused investment-banking firm. "We're clearly in the midst of the biggest energy bull market in more than two decades and, outside of the global economy unraveling, it's very difficult to envision an end to the expansionary phase of this cycle during the next 24 months." This view has substance. At press time, the forward strip for oil was north of $50 for 2005 and 2006-considerably higher than Wall Street's tamer expectations of $39 and $35 for those years. "If the commodity markets are correct and Wall Street is wrong, we could still see quite a move in energy stocks," contends the former head of trading for Howard Weil. Supporting the case for a secular period of sustainable high crude prices are two salient facts: the annual global oil-production decline curve is now around 5% while demand for that commodity is increasing by 1.5% to 2% per year. "This means we need to add about 5.5 million barrels per day to global oil supply just to keep pace with declining output and incremental demand," says Parker. "However, beyond the short term, we don't see OPEC being able to add any meaningful productive capacity." Given this supply-constrained outlook, he expects 2005 and 2006 crude prices to move in a broad band between the high $30s and high $50s with an average price in the low to mid-$40s. While the stocks of major oils and E&P companies have led the energy-sector charge on Wall Street so far, Parker believes oil-service stocks-which didn't get off the ground until mid-2004-are poised to accelerate at a faster rate through the balance of 2005. "Overall, the service companies have excellent balance sheets and they've been fairly diligent about not adding new capacity; as a result, rig utilization and dayrates are improving for most drillers while product pricing for suppliers continues to move up," says Parker. "So this group is positioned to deliver earnings that exceed Wall Street's expectations." Meanwhile, there's still plenty of earnings steam and share-price appreciation left in the stocks of major oils and E&P companies. However, given the huge run-ups in these stocks, sell-oriented value investors and buy-oriented growth investors-respectively nervous about the frothiness of recent energy share prices and watchful for some market pullback as an entry point-will likely kick the tires of these groups a second time this spring before driving off the lot. "In 2004, the themes investors were hearing from these groups at energy conferences such as our own were capital discipline, increased dividends and stock buybacks," says Parker. "This year, those are the last things they want to hear. "Instead, buysiders are going to want to know whether an oil and gas company has repeatable plays-be it in the Barnett Shale, Malaysia or West Africa-and a willingness to spend cash flow to drill and add to its reserve base." Also, investors will want to know how operators plan to react to various commodity-price levels and how capital will be deployed at those levels, adds Parker. "This will help them better understand what growth rates to expect under various commodity-price scenarios." In addition, buysiders will be more focused on racier, smaller-cap E&P stocks that hold big promise and that have recently hit new 52-week highs. Among alternative energy investments, coal producers should continue to capture investor interest. Parker notes that high utilization of the domestic coal-fired, electric-generation fleet; strong international demand; and deliverability constraints have all combined to create tremendous upside pressure on coal prices. In the past year, Appalachian coal prices have climbed from the high $30s per ton to $60-still economically attractive versus recent natural gas prices of $6 to $6.50.