A better way to compare energy stocks rather than using P/E is to look at their reserves.  What I like to do is a simple calculation:

1. Look up each company's SEC 10-K report and search for the term "discounted future net cash flow".  All oil drillers and producers calculate the future net cash flows of their proven reserves based on a standardized 10% annual discount formula.
2. Divide it by the number of outstanding common shares.
3. This tells you the future net cash flow per share only for proven reserves.
4. Compare that with the current stock price to gauge how much of a premium or discount the market is placing on the company's future cash flows.
5. Sometimes if the company has a lot of probable reserves, I might factor that into the calculation as well.

All of the following companies reported their reserve numbers at the end of December 2005 and therefore used the same oil and gas commodity prices for their discounted future net cash flow calculations.  I highlighted numbers that were comparatively lower (potential bargain indicators)

Symbol	Company	P/E	DFNCF (Mill)	Shares (Mill)	DFNCF /Share	Stock Price	Premium
CVX	Chevron Corp	9.20	$84,287	2,180	$38.66	$72.73	88.11%
COP	ConocoPhillips	6.80	$53,948	1650	$32.70	$71.05	117.31%
OXY	Occidental Petroleum Corp	9.00	$25,593	841	$30.43	$49.13	61.46%
APA	Apache Corp	7.90	$24,528	329	$74.46	$66.68	-10.45%
DVN	Devon Energy Corp	9.50	$23,574	442	$53.33	$68.11	27.70%
CNQ	Canadian Natural Resource	9.70	$21,373	538	$39.77	$51.99	30.74%
CHK	Chesapeake Energy Corporation	6.60	$15,967	436	$36.55	$29.80	-18.47%
XEC	Cimarex Energy Co	7.00	$3,028	83	$36.55	$37.37	2.25%

As you can see, XEC, APA, and CHK not only sell at a lower P/E than their peers, but the market is not placing a premium on their proven reserves. In fact, APA and CHK are selling at a discount to their future cash flows which screams value especially when their peers have a premium of at least 30%. Imagine what will happen if the price of oil or natural gas goes up...

Just for fun, the above table of stocks was generated from the energy holdings of some of the world's best investors listed on GuruFocus:

CVX	David Dreman
COP	David Dreman, Warren Buffett
OXY	Charles de Vaulx, David Dreman, George Soros
APA	Charles de Vaulx, David Dreman
DVN	David Dreman, George Soros
CNQ	Bruce Berkowitz
CHK	David Dreman, Mason Hawkins
XEC	Marty Whitman

The reason I used the guru energy holdings was to prove my point about all of energy being undervalued.  Value investors each have their own way of analyzing value in stocks.  True all of those stocks have single-digit P/Es and high growth in common, but the gurus picked their individual holdings based on other merits no doubt.  Personally, I like using the discounted cash flow analysis.

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2006-12-24-Discounted_Cash_Flows.xls	16.5 KB