Sector Watch: Energy stocks

With average crude oil prices having risen 26% since 2005 and expected to climb another 12% next year, opportunities still abound for small-cap exploration and production companies such as BPZ Resources Inc. (AMEX: BZP) and Constellation Energy Partners LLC (NYSE: CEP) to increase cash flow and earnings through accretive acquisitions and low risk drilling.

Crude oil prices will average around $80 per barrel in 2008, according to the Energy Information Administration, as prices currently flirt with $100. The recent price gains have reflected demand growth, geopolitical tensions, depleted inventories and worldwide refining bottlenecks.

Both companies have been able to capitalize on the rising prices and have recently acquired stable, long-lived producing properties in low-risk markets. 

BPZ Resources has licenses for oil and gas exploration and production covering 2.4 million acres and four properties in northwest Peru. The company also owns a minority interest in a producing property in southwest Ecuador. Development activities are focused offshore Peru in the Corvina Field of Block Z-1. Test results from development wells drilled indicate sizable recoverable reserves with multiple zones testing over 5,000 barrels of oil and 19 million cubic feet of gas per day.

The company plans to commence Corvina Field production in November at 2,500 barrels of oil per day, rising to 4,000 barrels per day in early 2008. Storage and barges have already been secured for transporting production to a nearby refinery.

Future natural gas production will be shipped via a 10-mile pipeline to a power plant BZP Resources is building that will supply electricity to northern Peru. Capital costs for the pipeline and power plant are estimated at $161 million. The company has already secured a $100 million funding commitment from a member of the World Bank Group and is actively negotiating to increase the financing package to $165 million.

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