It was just a few days after Hurricane Katrina shredded much of southern Louisiana and Mississippi. Along with the human suffering came economic woes, as many people presumed that our refineries along the Gulf Coast had been blown away as well.

A gallon of regular unleaded was going for $3.05 at the cheapest place in town, and people were piling their cars into the small parking lot. Some of the eager motorists even spilled out onto the main road, backing up traffic for almost a mile.

But today, it’s off our collective radar screen. Gas is cheap — crude has even traded as low as $50 a barrel. And for the past couple of months, some consumers have been filling their tanks for less than $2 a gallon.

How quickly we forget…

By looking at the performance of oil companies over the past several months, it is quite evident that the average investor has become almost completely oblivious of one of the world’s most profitable businesses.

The current P/E ratio of the independent oil and gas industry is 12.6. Major oil companies have an average P/E of only 9.8. The P/E of the S&P 500 is 20.7.

And the break we’re experiencing in higher oil prices probably won’t last too much longer.

OPEC recently announced that it might decrease oil production. President Bush has said that he wants to double the strategic petroleum reserves. Winter’s biting cold finally arrived (a couple months late), forcing us to break out the heating oil. And let’s not forget about driving season. Summer’s not too far away…

While these events might not send gas prices back through the roof, the demand is there. And $50 oil will not stop the energy dealers from turning a profit.

With that in mind, I present you with these three independent oil companies. All three of them have price-to-earnings ratios of less than 10, and only one is trading above $10 a share.

Keep your eye on these deals…

Callon Petroleum (CPE: NYSE)
Market cap: $284 million
Price/Earnings: 7.49
Price/Sales: 1.75
Recent price: $13.70

Callon explores and produces natural gas and oil from the Gulf Coast. It has joint ventures with British Petroleum and Murphy Oil to explore more sites in the Gulf of Mexico. Callon has reported estimated proven reserves of 188.6 billion cubic feet of natural gas equivalent.

The company estimates that its production will increase approximately 15% from 2006 to 2007.

VAALCO Energy (EGY: AMEX)
Market cap: $373 million
Price/Earnings: 9.68
Price/Sales: 3.66
Recent price: $6.39

Vaalco develops land for oil and natural gas production in the Texas Gulf Coast and also Africa. In its most recent quarterly earnings announcement, Vaalco reported net income that had risen more than 16%.

This former Small-Cap Strategy Report pick netted readers 109% gains, but has since pulled back from its highs that reached above $10.

Brigham Exploration (BEXP: NASDAQ)
Market cap: $262 million
Price/Earnings: 8.71
Price/Sales: 2.30
Recent price: $5.75

Brigham has wells in Texas, Oklahoma and Louisiana. The company finds its oil and gas by using high-tech seismic equipment. Brigham has estimated reserves of 133.2 billion cubic feet of natural gas equivalent.

Best,
Gunner
January 29, 2007

Small-Cap Oil Stocks was originally featured in the Penny Sleuth.