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Boom time for oil explorers - but will it last?

LONDON, Sept 6 (Reuters) - It is boom time at many oil exploration firms, who are proving that putting your money into drill bits instead of shareholders' pockets can pay off superbly.

Record high oil prices and a string of exploration successes have made them investors' darlings this year, and analysts say aggressive drilling programmes will bolster their shares even further -- provided the discoveries keep coming.

Shares in some exploration firms -- often a boom-or-bust bet for investors -- have tripled and quadrupled in value in the past year, outperforming the sector and giant integrated peers such as Shell and Total.

"If you look back, you see that the companies that have outperformed the sector the greatest are the ones focussed on exploration," said Al Stanton of Deutsche Bank.

Shares in British Cairn Energy (CNE.L: Quote, Profile, Research) , for instance, have tripled in value in 2004 following several oil finds in India. Its stock has outperformed the sector (0#.FT01: Quote, Profile, Research) by 50 percent this year and is poised to enter the FTSE index of top 100 firms.

Dana with a 250-million pound market capitalisation, has outperformed the sector by almost a third this year, having doubled its reserves via a find off Mauritania in West Africa.

In comparison, BP is up 15 percent and Total about 10 percent, despite generous share buybacks and dividends.

Bruce Evers at Investec says the drilling successes of Dana, Cairn, Burren (BUR.L: Quote, Profile, Research) and Tullow in West Africa, have whetted investors appetites with the promise of more to come.

"The main reason is these companies' extremely active exploration programmes. People are hoping for more good news on the lines of Cairn's amazing discoveries in India," Evers said.

Worries over rapidly eroding global oil reserves in the face of fast rising world oil demand, are partly responsible for pushing oil prices to almost $50 this year.

But majors intent on strict capital discipline and reluctant to spend cash on developing small fields, are holding back from exploration, preferring instead to return money to shareholders.

James Crandell of Lehman Brothers (LEH.N: Quote, Profile, Research) forecasts capital spending globally to rise 12 percent this year, much of this accounted for by independent exploration-oriented oil firms.

Independents are non-integrated firms that earn most of their revenues from output at the wellhead and have little or no marketing or refining operations. Their resurgence contrasts with some years ago when many were gobbled up by their larger peers.

Analysts say these firms benefited from the series of asset disposals, generated by the mega-mergers and portfolio appraisals of the late 1990s, when oil majors sold off smaller and older fields.

In the North Sea for instance, the majors have sold to smaller players like Apache (APA.N: Quote, Profile, Research) and Venture (VPC.L: Quote, Profile, Research) . These assets bought cheaply have generated enough cash, thanks to the high oil prices, to finance drilling in the more remote parts of the world.

Small oil concessions in countries such as Madagascar and Pakistan also rarely attract the majors.

"The majors are not interested in fiddling with small 50,000 barrels per day (bpd) fields. So the slack is being picked up by the independents," says Jim Ahmad of IHS Consultancy.

TAKEOVER TARGETS

But many may have to look over their shoulders. Analysts say the industry could be heading for another wave of takeovers such that of the 1990s, when mid-sized firms such as Enterprise, Lasmo and Monument were bought up by majors.

And this is likely the objective of most investors -- the pot of cash at the end of the rainbow, rather than dividends.

"Some of these companies are coming up to the size when they will attract the majors," said Finlay Thomson of ABN Amro.

"They have good acreage, generating decent cash. And basically, the big guys are running out of stuff to explore."

Analysts caution that investors piling on to the bandwagon following the Cairn and Dana finds, could be disappointed. Any sharp price fall will hit profitability far more than at firms with a refining and marketing cushion.

A lot of the recent stock gains have sprung from sentiment rather than actual drilling results, with most companies riding on the coat tails of the few successful ones.

"So far it is not a great exploration result and a lot of the sector is already looking fully valued," Thomson said. "The downside is maybe Cairn is a one-off and most will not deliver. A string of disappointing results and they will all suffer."

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