HOUSTON, Jan 12: With prices for oil and natural gas both down sharply from record year-earlier levels, upcoming earnings reports from US exploration and production companies are unlikely to provide much of a morale-booster for investors.

Analysts expect earnings to fall by 68 to 97 per cent for the seven companies that make up Standard & Poor’s oil and gas exploration and production index, according to Thomson Financial/First Call, which tracks earnings estimates.

Oil prices fell 36 per cent and gas prices by 58 per cent compared with the previous year. Fourth-quarter earnings are also expected to be burdened by writedowns to bring values of oil and gas reserves into line with the lower prices.

Analysts looking beyond the recently concluded quarter generally don’t see much to give earnings and stock prices in the sector much of a lift, at least in the first half of 2002.

Exploration and production stocks have drifted lower in the first two weeks of 2002 as mild weather erodes demand for gas to heat homes and investors ponder whether Opec production cuts will offset sluggish global demand for oil and prop up prices.

The sector rallied from its late-September lows along with the rest of the US stock market in the final quarter of last year, but the S&P exploration and production index still posted a loss of 22 per cent for the year as a whole.

Analysts said the picture should start to improve in the second half of the year, if forecasts of a nascent economic recovery by then turn out to be accurate.

At about the same time, they expect the natural gas market to tighten up as gas supplies start to show the effect of a downturn in drilling under way since the middle of last year.

Most US exploration and production companies are geared more to natural gas than oil production, unlike the larger integrated oil companies that also refine crude oil and market the resulting products such as gasoline and aviation fuel.

Analysts expect investors to focus in the short term on companies that can deliver volume production growth despite cuts in their drilling budgets in response to lower prices.

Among larger exploration and production companies Lehman Brothers analyst Tom Driscoll favors Unocal Corp. which he says has improved its performance dramatically over the last 18 months, particularly in the Gulf of Mexico and Indonesia.

They’ve got some great long-term assets in Asia.

There’s no value in the stock today for a lot of these things, but I think over time they will get some recognition for them, he said.

Bradshaw singles out Anadarko Petroleum Corp. because of its broad portfolio of ready-to-drill targets which enabled it to shift its efforts last year toward long-term projects, rather than short-term ones intended to take advantage of high prices.—Reuters