The first half of the year can be summed up in one word-volatile. Following an early stumble out of the blocks, energy stocks have rebounded nicely and performed exceptionally well throughout the first half of the year.

Early concerns over increasing natural gas and crude inventories were quickly alleviated when a blast of Arctic cold blanketed much of the U.S. during February, serving to jump-start the group's performance. Since then, follow-through support has been provided by strong relative performance, since energy has been the best-performing sector through early June; continued stability in commodity prices after the late start to winter; and the perception of inexpensive relative valuations.

A look at Tristone Capital's Large and Small/Mid-Cap U.S. E&P indices shows the groups are both up 21.5% year to date, which is essentially in line with our 50/50 Gas/Oil Commodity Price Index that is up 20.2% this year. Importantly, the groups have meaningfully outperformed the broader S&P 500 Index that is up some 7.0% in the same time frame.

Commodity prices have remained strong primarily due to cold weather in February; robust gasoline demand, coupled with tight supplies due to refinery shutdowns; and ongoing geopolitical tensions in the Middle East and Africa. These factors have all served to keep oil prices firmly above $60 per barrel and gas in the $7- to $8-per-million-Btu range for much of the year.

Oil, gas supply. Looking forward, we continue to expect a tightening natural gas supply/demand balance throughout 2007, although we remain cautious in the near term, given the rapid pace of injections-storage levels are sitting at 2.163 trillion cubic feet at press time, 20% above the five-year average-and recent U.S. gas-production data indicating higher-than-expected year-over-year growth.

For oil, U.S. inventories are peaking just below last year's record level, and gasoline inventories have finally started to climb-inventories at press time were 4% below the five-year average-as gasoline imports are running high and refiners increase activity following seasonal maintenance. We continue to expect product inventories to remain tight as refinery utilization stumbles.

E&P MLPs. The hot topic in the U.S. E&P space right now is the re-emergence of upstream master limited partnerships (MLPs). Starting with the IPO of Linn Energy LLC in January 2006, MLPs have received a lot of attention, given the higher valuations the market is willing to assign-some 11.5 times 2007 enterprise value/EBITDA (earnings before interest, taxes, depreciation and amortization) versus a multiple of 6.0 to 8.0 for traditional E&P companies.

The six publicly traded U.S. upstream MLPs have exhibited strong performance, gaining some 33% year to date and 63% since October 31, when changes were proposed in Canada for the tax treatment of flow-through entities, including royalty trusts.

Many improvements and changes have been made since the upstream MLPs that were seen in the 1980s. Some of these changes include the more effective use of hedging, a willingness to invest more capital to maintain production and favorable tax-law changes. These changes have expanded the pool of potential investors that upstream MLPs can access.

In addition, due to the lower cost of capital afforded to an MLP, theoretically a C-Corp can form or partner with an MLP to more effectively compete for acquisitions. The MLP could afford to pay a higher price for the long-lived, proved developed producing (PDP) reserves component giving the C-Corp the ability to more aggressively pursue a portion of the proved undeveloped (PUD) reserves and the probable and possible upside.

For these reasons as well as others, we expect the trend toward the use of upstream MLPs to continue for the foreseeable future. Beyond the six upstream MLPs that already exist, we are aware of at least twice that many that have been registered with the SEC or are seriously being considered.

Oilfield services. On the oilfield-services side, the first half of 2007 has been equally impressive. The index is up 28.5% year to date and not even a profit warning from Halliburton in late March could slow it down as solid first-quarter 2007 earnings announcements and strength in underlying energy prices boosted the index to an all-time high.

Since March, the best performers in Tristone's service-sector universe have been the floater companies, as they continue to benefit from the secular uptrend seen in deepwater drilling and construction activity, their strong long-term visibility and large free-cash-flow generation. The jack-up group has come off the relative lows hit in March and has rallied off the Hercules Offshore acquisition of Todco and the slight up-tick in utilization in the Gulf of Mexico.

The international jack-up market remains strong; however, weakness could be seen in 2008 as several under-construction jack-ups enter the market without contracts. Land drillers also have performed well since April, benefiting from strength in natural gas prices and the stabilization in the Baker Hughes U.S. rig count. Tristone Capital is a member of SPIC.

-Larry Busnardo, 303-952-2750;

Joe Magner, 303-952-2751;

and Waqar Syed, 303-952-2753