TER: Switching to oil, it's currently trading around $80, but as you said, the stocks are performing as if it's at $60. What do you like in that sector?

DG: When you look at the United States, the only mature projects that are oily rather than gassy are pretty much in California, Alaska and the Permian Basin (western Texas and southeastern New Mexico). More recently the Bakken Projects in North Dakota have been very encouraging, as well. So, while not all that many companies are leveraged to oil in the domestic landscape, those are the companies we like to do a lot of work on.

We're focused on mid-sized companies and are quite constructive on companies having exposure to the stronger oil markets in a period where most of the investment community has spent a lot more time trying to find gas upsides rather than oil. That includes companies such as Berry Petroleum Company (NYSE:BRY), Plains Exploration and Production Company (NYSE:PXP) and Whiting Petroleum Corporation (NYSE: WLL).

TER: Could you talk a little bit about what you see as the opportunities in some of those companies, maybe starting with Berry?

DG: Berry has an incumbent position in California producing heavy oil. It was originally a family-operated company, and eventually became public and stuck to its knitting of doing heavy oil on the same acreage that the Berry family had been developing since the early part of the 20th century.

So, here's Berry with very low geologic risk in California, captive acreage that has deeper potential, with a lot of visibility with reserve upsides, and with technology that has progressed over the last 20 years to a point where very low finding and development costs are a normal part of what Berry does.

A year or so ago, with the higher commodity prices, Berry decided to try to diversify into some of the sexier shale projects, and ended up using a lot of liquidity in pursuit of a land grab in East Texas. That turned out to be very poorly timed, considering the collapse of the commodity market in 2008. They've gotten away from the idea that this is the right time to be expanding into natural gas.

So with Berry, we have a story basically of deleverage of the balance sheet afforded by these higher oil prices and going back to their core business of oil production. So that's a name we continue to like.

TER: You also mentioned Plains Exploration and Production Company.

DG: Plains is another very interesting producer. Its CEO has been famous as a serial dealmaker over the years, and our view is that Plains is finally to a point where its portfolio really doesn't need any tinkering. It also has a very large California position, which gives Plains a base load of oil production and makes it an oily producer, again a scarce thing within the sector.

In addition, the company has a 20% position in Chesapeake's Haynesville program. That is a huge project with a multi-year, even multi-decade development ahead of it, so it was quite a big step and a growth engine for Plains. Beyond that, Plains also participates in the McMoRan exploration program offshore, and has some oil exploration in the Gulf of Mexico with partners like (Royal Dutch Shell plc [NYSE:RDS.A]). So it's a very diverse upside portfolio and a very stable ongoing production system. And the market has really under-rewarded Plains for the scale of upsides it has.

TER: And how about Whiting?

DG: It's a very interesting name in terms of its position in the Bakken, where Whiting has put together acreage that is partly shared with EOG Resources in North Dakota and has been putting on very high initial rate wells in the Bakken both with EOG and in their own independent project.

So basically Whiting has become increasingly oil-leveraged. The Bakken is fairly new for Whiting, but it also has water-flood and CO2-flood projects in Texas and Oklahoma that represent about 50% of their reserves. While the market was out there looking for the next big gas shale play, a name like Whiting sort of stayed under the radar screen, and recently the stock has done quite well. Some competitors that are also active in the Bakken—such as Continental Resources, Inc. (NYSE:CLR)—have been perhaps over-rewarded for the upside there, so we continue to be very positive on Whiting, which is cheap relative to Continental.

TER: How would you tell investors to divide oil and gas in their portfolios over the next 12 months?

DG: At this point, we're much more constructive on oil names than the gas names. That doesn't mean staying away from gas as much as it means sticking with the gas players who are diversifying. A good example of a quality gas name is XTO Energy Inc. (XTO), which has a very strong balance sheet and is building out its business oil-wise, both in the Bakken and the Permian Basin. However, we think the market is rewarding XTO shares now to a point that prompted a recent downgrade by us from a "BUY" to a "Fair Value" rating on valuation. We see Chesapeake and EOG Resources as cheaper high-quality exposure to gas, with an eye on more diversification over time.

We would definitely be very positive on getting exposure to both the under-rewarded oil leverage—Berry, Plains and Whiting—and taking an element of exploration exposure. Here I think of Plains Exploration and also the McMoRan program, directly but also especially through the leveraged exposure investors get by owning Energy XXI. That's a smaller name that we think will be around for a long time, or one that may reward investors in a merger scenario.

In summary, we like oil better than gas; we like the gassy players that are getting oilier, and we like an element of exploration with some track record attached to it.

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