The rising tide of commodity prices is lifting all boats in the energy space. This spring, across the principal oil and gas sub-sectors, there was positive sentiment among analysts about the long-term fundamentals of the industry and about remaining stock-buying opportunities. "We continue to believe that robust oil and gas prices will be sustainable for the foreseeable future," says Wayne Andrews, E&P analyst in Houston for Raymond James & Associates. "Since the market continues to value E&P stocks using commodity prices well below our estimates and forward Nymex price curves, we still find the upstream group very attractive and therefore look for solid stock-price performance ahead." Andrews encourages investors to focus on E&P companies that are growing production at the highest rate per debt-adjusted share and that trade at an attractive valuation relative to growth, risk and return. Noting that no single metric can capture a producer's ability to create value, Andrews suggests investors also focus on independents exhibiting strong cost-management ability, which can help an operator generate better-than-average growth in earnings and free cash flow. The large-cap upstream stocks that stack up best overall under these metrics are Chesapeake Energy, Occidental Petroleum, Ultra Petroleum and XTO Energy, he adds. Among small/midcap stocks, his top picks are Bois d'Arc Energy, CNX Gas, Comstock Resources, Energy Partners, Range Resources and Western Gas Resources. Meanwhile, Robert A. Kessler, an analyst with Simmons & Co. International in Houston, remains Overweight the integrated oils, given his expectation that free-cash-flow generation within the group will continue to outperform consensus estimates. "The integrated oils have a current free-cash-flow yield of 10% for 2006, impressive in what is still a relatively low interest-rate environment," the analyst adds. Net of rising tax rates, service costs and potential acquisitions, positive fee cash flow should continue to dominate the share-price performance of the integrateds, he believes. His net-asset-value-based 12-month price targets for the integrateds reflect a 31% upside. Within the group, Kessler prefers leverage to the midcap integrateds-companies like ConocoPhillips, Amerada Hess and Suncor-which are more cheaply valued and have more production-growth potential than the large-cap integrated companies. Within the latter group, "Chevron remains the cheapest stock on all metrics and has above-average leverage to oil prices relative to its peers," he says. "For safety and stability of investment returns long-term, ExxonMobil remains the 'go to' name." Judson E. Bailey, an oil-service analyst in Houston for Jefferies & Co., points out that due to the unprecedented contract backlog and growth of international and deepwater markets, the compelling long-term outlook for the offshore drilling industry makes current valuations within that group attractive. Early this spring, "our offshore drilling group traded at about 9.2 times our estimated 2007 earnings per share, 7.1 times our estimated 2007 cash flow per share, 5.9 times our estimated TEV (total enterprise value)/EBITDA (earnings before interest, taxes, depreciation and amortization) and 103% of replacement cost," says Bailey. "Given our expectation of a multi-year cycle, we expect trading multiples for the group to expand for 2007 as investors grow more comfortable with the one-to-two-year outlook." The analyst's favorite offshore-driller stock remains GlobalSantaFe, citing its balanced portfolio of long- and short-term contracts and jackup- and floating-rig exposure. His other two top picks are Diamond Offshore and Ensco International.