Barron's: Oil Guru Art Smith's Picks for 2007

INTERVIEW: The Big Question for Big Oil: Where to Invest? by Sandra Ward

Summary: Barron's interviews Art Smith, head of John S. Herold energy research firm. Some key points:

• Big companies have essentially stopped exploration, using profits for stock-buybacks and dividends. Eventually large companies will start pursuing those companies that hold undeveloped reserves and require capital.
• Natural gas prices are low in comparison to oil. Among the most undervalued companies: Anadarko Petroleum Corp. (APC), Chesapeake Energy Corp. (CHK), Apache Corp. (APA), EnCana Corp. (ECA) and Canadian Natural Resources Ltd. (CNQ).
• He's 'crazy' about oil-sands reserves, and is 'absolutely convinced' big players Suncor Energy Inc. (SU) and Nexen Inc. (NXY) will be acquired by big companies. "Buy some and put it in your kids' or your grandkids' account and just forget about it."
• He recommends writing covered calls on cheap stocks, specifically ConocoPhillips (COP) and Royal Dutch Shell (RDS.A).
• There is a re-emergence of the master limited partnership [MLP]. Upstream companies that stand to benefit from the cost-depletion tax advantage: Linn Energy LLC (LINE), EV Energy Partners (EVEP), Kinder Morgan Energy Partners L.P. (KMP), Enterprise Products Partners L.P. (EPD) and Plains All American Pipeline L.P. (PAA).
• Oil prices (USO): "I'm in the camp that says we could easily have $80 oil this year."