The romanticism of vast untapped upside was wooing investors to shale-focused explorers even before the downturn. And now, the resource plays’ repeatability and reduced exploration risk profile are keeping investors enthralled.

“It gives investors a sense of comfort,” says Curtis Trimble, E&P equity research analyst for Houston-based Natixis Bleichroeder LLC. “You can see that reflected in much higher multiples” for shale players.

Ray Deacon, senior research analyst with Pritchard Capital Partners LLC, says investors are worried about prolonged low gas prices, so they are looking for companies that can respond. “We try to find companies at the low end of the cost curve that can survive if prices are weak for a period.”

Because of weak gas prices, New York-based Jefferies & Co. Inc. managing director Subash Chandra focuses on shale oil versus shale gas. “It looks economic even in a lower price environment. We don’t have to assume some utopian macro environment to make these plays work.”

Oil and Gas Investor asked five analysts to discuss their top shale-focused E&P stocks.

Continental Resources Inc. “I’m enthusiastic about the shares of Continental Resources (NYSE: CLR),” says Natixis Bleichroeder’s Trimble, who has a price target of $49.

“We very much like the vast amount of running room these guys have up in the Bakken, both on the North Dakota side and on the Montana side. The company has done an excellent job of maintaining balance-sheet liquidity, so they should have no problem funding their future growth objectives.”

The Enid, Oklahoma-based producer was one of the earliest companies in the Bakken oil-shale play, has the most wells there, and has been driving technological advances. With some 600,000 acres—the vast majority undeveloped—the sheer size of its position gives Continental an advantage over peers, he believes. Trimble identifies 1,000 or more prospective locations in its overall portfolio.
And with 35,000 barrels equivalent a day of current oil production coupled with relatively low debt, “if these guys were to push the envelope, they could easily have north of $1 billion of liquidity and triple the number of rigs they have running this year.”

Significantly, the company has recently tested a “two-reservoir concept” in which it separately produces the Middle Bakken and the Three Forks-Sanish formations. The technique effectively is a downspacing opportunity from traditional 1,280-acre spacing to 640 acres, with one well tapping the Middle Bakken and another interlaced into the Three Forks-Sanish.

The flanks of the play, north of Elm Coulee Field in Montana, are evolving into drilling opportunities as well. “If we see comparable results from Montana, which hasn’t been drilled with the same technologies as the areas around the Nesson Anticline, you easily could see another step up in valuation.

“On valuation, Continental appears to be fairly expensive,” he points out, “but I think a premium valuation is warranted for them. Continental looks like the place to be in our opinion; hence, our Buy rating.”

St. Mary Land & Exploration Co. Jefferies’ Chandra thinks St. Mary (NYSE: SM) gets limited credit for its Eagle Ford shale position, despite drilling “more than a handful of pretty good wells.”

Denver-based St. Mary is Chandra’s top name in the Eagle Ford, and he gives it a Buy rating with a $48 target price.

“We like it because they have an active drilling program, they have results, they’ve booked a tiny fraction of their total resource potential, and in 2010 they have the potential to add much, much more in the way of Eagle Ford reserves.”

Chandra says the company’s share price today can be validated on proved reserves alone by the end of 2011, “so you’re getting a lot of the Eagle Ford for free.” And compared with other companies with a more generous Eagle Ford valuation, “St. Mary looks downright cheap.”

St. Mary had lost some of its audience with previously poor drilling results, he explains. The turnaround has been “tortured,” just coming together in the past nine months.

“A lot of folks are just plain ignoring the company and the prospects. It’s going to take some show-me type results to convert those folks into believers.” But those issues have been rectified, he says, and “we’re just a quarter or two away from having some appreciation for the name.”

Wells Fargo Securities LLC managing director David Tameron also picks St. Mary as a top shale-focused E&P stock. “As the Eagle Ford goes, so goes St. Mary,” he declares.

The company holds 250,000 acres in the play and, if only one-third of the acreage proves productive, “this alone could be worth $25 a share for the stock. There is still a lot of room left to run.”

And with just 65 million shares outstanding, “on a straight per-share basis, pound for pound they have more relative exposure than anyone else in the play. As Eagle Ford momentum builds, St. Mary’s shares should work.”

He, too, notes the Street questions the company’s operational depth, but also thinks new management has its team in place and has executed. Eleven publicly disclosed Eagle Ford wells with “solid” results, including five with seven-day average rates exceeding 7 million cubic feet equivalent, are proof.

“Street expectations are low for St. Mary, but as management executes and well results are released from key plays, St. Mary shares will outperform its peers in our view. People will come back to the stock.”

His price target is $46.

EOG Resources Inc. Jefferies & Co. analyst Biju Perincheril likes Houston-based EOG Resources (NYSE: EOG) as a trailblazer in many emerging shale-oil plays. “Anywhere we see potential for shale oil,” he says, “EOG seems to be a first mover. We like it because you’re not paying up for that potential.”

Looking to 2011 reserves, he places a net asset value of $113 on the stock, even without much contribution from the company’s Eagle Ford shale or Niobrara positions. “In reality, in 2011 they will have a pretty strong program in both of those plays.”

The company has a reputation for being tight-lipped about results, so the analyst relied on industry anecdotal evidence to make his determination in advance of a pre-publication analyst day in April. EOG has acknowledged an Eagle Ford program, “and the numbers we’re hearing point to a very economic program.”

Likewise, based on drilling permits, EOG is the most active operator in the emerging Niobrara oil shale, where it recently went to a two-rig program.

The company’s foundation assets are in the Bakken and Barnett shales, which will drive near-term growth of 13%, per company guidance, says Perincheril. “The Eagle Ford and Niobrara will be on top of that.”

Cabot Oil & Gas Corp. Pritchard’s Deacon chooses Cabot Oil & Gas (NYSE: COG) as “one of the lowest-cost producers out there,” a critical corporate trait in a low-gas-price environment. “Their drilling program stands up to low gas prices,” he says.

The company’s 190,000 largely contiguous acres in the Marcellus shale are focused in Susquehanna County, Pennsylvania, a sweet spot in the play where the economics work down to $2.50 per thousand cubic feet.

“These guys will be one of the fastest growers this year and have some of the highest rates of return on their drilling program of anybody out there,” says Deacon. Company guidance of 18% to 22% production growth this year “looks very low to me.”

His target price for Cabot is $56.

Already the company has tripled its Marcellus production year-over-year to 100 million cubic feet per day. With another 75 wells in the play coming online in 2010, it could top 200 million cubic feet per day, well above current guidance.

“When the market sees that growth, they’ll be rewarded with a better multiple.”

Additionally, much of the same acreage is prospective for the Purcell shale above the Marcellus, which could be “a whole other layer of development to do.”

Many large players operate around Cabot and are starting to drill 5,000-foot laterals, twice the current norm, so results could get much better. Says Deacon, “I don’t think it’s crazy to think that somebody would take out these guys to get that position.”

Petrohawk Energy Corp. What was once a darling in the E&P space has languished, says Natixis Bleichroeder’s Trimble of Petrohawk Energy (NYSE: HK), creating opportunity for investors.

“Petrohawk is just good old-school upside,” he says.

The Houston-based company’s recent stock woes originate from an aggressive program of issuing equity to fund growth plans over the past two years, satiating the market with shares.

However, given its substantial position of more than 150,000 acres in each of the Haynes­ville shale, the rapidly evolving Eagle Ford shale in South Texas, and a very solid core in the Fayetteville shale, the diversity of production should reward Petrohawk shareholders in the future, Trimble says.

Petrohawk trades at more attractive valuation metrics than other comparable premier players such as Range Resources Corp. and Southwestern Energy Corp., which trade up to a premium in excess of 50% to Petrohawk shares when “the best you could argue for is 15%.

“We think Petrohawk should be included in the premier status,” says Trimble. “There’s no doubt they’re undervalued now. You’re going to get more bang from your buck out of Petrohawk shares.”

He points to year-over-year production growth of 65% in 2009. As Petrohawk puts up substantial production growth year-over-year of 500 million cubic feet equivalent per day, “we think investors are going to warm up.”

Trimble says investors are missing Petrohawk’s ability to drive down its operating costs and expand its margins. “When you’ve got a natural gas market that’s been as volatile as it has for the past two years, the ability to control your expense line and drive those higher margins is hugely accretive to investors.”

His target: $28.

Ultra Petroleum Corp. Tameron of Wells Fargo selects Ultra Petroleum (NYSE: UPL) as a top pick as the company builds on its deep experience as a low-cost producer in its legacy Pinedale/Jonah asset in Wyoming and applies that to new holdings in the Marcellus.

“The company has a history of being in the forefront and doing it well,” he says.

Year after year the company is top tier in cost structure, with all-in F&D costs of $1.29 per thousand cubic feet equivalent. His target price is $70.

Tameron sees significant valuation upside left in the Wyoming assets, which are getting “very robust economics” at 5- to 6 billion cubic feet of gas estimated ultimate recovery (EUR) for about $5 million per well. “On the risk curve it’s way down low compared with some of the new shale plays where we’re not sure how they’re going to hold up.” Likewise, new pipelines coming out of the Rockies mean price differentials are disappearing.

But Ultra’s 25,000 acres in the Marcellus, acquired at an attractive average $4,000 per acre, represent most of the valuation upside. “The Pinedale is throwing off a lot of cash, but if the Marcellus works, that’s where you get the nice, sexy growth angle.”

Ultra will participate in up to 150 Marcellus wells in 2010.

Tameron believes investors underappreciate Ultra’s long-term returns. It is growing 20% per year on a per-share basis and all internally funded without issuing shares. “From a return aspect, they have some of the better ROCE (return on capital employed) and ROE (return on equity) numbers in the industry.

“If you want to play top-tier best in class, Ultra is definitely a name to go to.”

Jefferies’ Chandra identifies Ultra as the firm’s cheapest name in the Marcellus and, in fact, as not reflecting any Marcellus value while trading in the mid-$40s. However, the market has lost patience with the company, he says, while it works out transportation logistics for its Marcellus production.

“It’s a timing issue, not a resource issue.”

His target price is $58.

Carrizo Oil & Gas Inc. “Carrizo is trading below net asset value because they focus on the Barnett, and that’s not justified,” says Pritchard’s Deacon.

Most investors have overlooked the fact that Carrizo (Nasdaq: CRZO) holds 14,000 undeveloped acres with some 250 drilling locations in southeastern Tarrant County in Texas, where average wells are now posting EURs of 7.5 billion cubic feet equivalent. “Those are some of the best returns out of any of the shale plays. They have benefited from the learning curve they’ve had in the Barnett over the last five years.”

Deacon notes Carrizo is on the low end of the cost curve, and will be “the last company that has to stop drilling” as a result. He places a value of $12 per share on the Barnett upside.

Carrizo began drilling on its 106,000 Marcellus acres in April in Susquehanna County, Pennsylvania, which should be a catalyst for the stock. He values the Marcellus acres at $4,000, or about $14 per share.

“They’ve got nothing in their guidance for success of any of these Marcellus wells, which is very conservative. If you look at what the competitors have done around them, that could be a big driver for Carrizo.”
Carrizo is “a breakout value story on their reserves and acreage.” Deacon has a $41 target price on the shares.

Whiting Petroleum Corp. Denver-based Whiting Petroleum (NYSE: WLL) is “one of the cheapest Bakken names that we cover,” says Jefferies’ Perincheril. “It looks to us like they have 35% to 40% upside.”

Perincheril’s price target is $108.

The drag on Whiting’s stock is a bearish sentiment that the company is out of running room in North Dakota’s Williston Basin, where it has operated and nonoperated interests in 88,000 acres in Sanish and Parshall fields and experienced early success.

Yet the company is testing a new area in southwestern North Dakota targeting the Three Forks formation—the Lewis & Clark prospect—outside its established production area. Whiting holds 200,000 net acres there, where it estimates 5- to 6 million barrels of resource potential, using a $75 oil price. It plans nine net wells in 2010.

“There are early indications this is going to be a very productive area,” says Perincheril. He points to an announced well late last year that was tested for an initial potential of almost 2,000 barrels of oil per day.

“On the Lewis & Clark upside, there is more drilling to be done to fully delineate that acreage, and up until then this running-room issue is going to be with them. But that’s quite a bit of potential locations. That’s where we see the opportunity.”

Forest Oil Corp. Forest Oil (NYSE: FST) is essentially taking unconventional technology and applying it to an old play, says Wells Fargo’s Tameron. Specifically, it is targeting the Granite Wash in the Texas Panhandle and Oklahoma, where it holds 100,000 net acres.

“They are now getting rates of return north of 100%, particularly given the liquids component, and Forest has a dominant position.”

Complement that with its recently unveiled play in Canada’s Alberta Deep Basin targeting the Nikanassin formation, aka The Big Nik, essentially a tight-gas formation that is the anchor zone within a series of cretaceous sands.

Forest is again exploiting its 105,000 prospective acres as it would a shale, with highly deviated directional wells and slick-water completions. Its first 10 wells drilled into the Nikanassin averaged 14 million cubic feet equivalent per day. Shell Oil and Devon Energy Corp. have reportedly drilled wells in the range of 25- to 30 million per day.

“Include the Alberta royalty and returns quickly approach 70%,” says Tameron. When considering rates of return and growth in these two plays, “it stacks up pretty well with a lot of names in the industry. Forest hasn’t been traditionally thought of in that regard. Given the faith people have in management, tack on some good-to-great assets on top of that, and it’s a name that’s got a lot of legs ahead of it. There are not a lot of negatives in the story today.”

With its success in the Nikanassin, Forest may now be viewed as having growth-potential, high-rate-of-return projects in the Nikanassin and Granite Wash, with the Haynes­ville as a “call option” on gas. “Combined with Utica potential, we believe Forest has created an identity that it lacked before. This is easily a $35-to-$40 stock.”

Swift Energy Co. The best way to play the Eagle Ford shale is via Swift Energy (NYSE: SFY), according to Pritchard’s Deacon. “Swift is a good buy for Eagle Ford believers. It’s got a lot of near-term drivers.”

The Houston-based company ranks third in Eagle Ford acreage at 76,000, with 475 locations, and second in its group for acres per diluted share. The company’s main challenge, says Deacon, is overcoming its neophyte status as a conventional player new to shales.

A joint venture on 26,000 Eagle Ford acres with Petrohawk Energy should propel the company up the steep learning curve, he says. “They’ll be successful, ultimately.”

Swift’s stock recently blew past Deacon’s price target of $33, and he is waiting to revise valuation upward pending news on three wells. “It’s hard to give them full credit until they’ve announced their results.”

Still, the analyst currently assumes only 12% of Swift’s acreage is productive when calculating the price target. “It could be much more.”

Brigham Exploration Co. Jefferies’ Chandra is intrigued that Austin, Texas-based Brigham Exploration (Nasdaq: BEXP) booked only 43 Bakken locations in its 2009 reserves report. “Conservatively, they have 400. On unrisked numbers, it goes up to 1,000.”

The stock has done “incredibly well” over the past year and detractors say it is too expensive. “But when you book less than 10% of your total potential, the more massive reserve increases are yet to come,” he argues.

“Brigham’s biggest reserve-growth year was not 2009—in all likelihood, 2010 and 2011 are going to be the biggest growth years. Also, beginning in the second quarter and throughout 2010 and 2011, we expect to see a very strong production response with cash-flow growth at a terrific rate. We’re thinking 2011 cash flows could be twice 2010 cash flows.”

His target­­­ price is $19.