Oil prices rose to close to $80 U.S. a barrel last summer, mainly due to tensions in the Mideast. But the price has dropped to below $60, as the slowdown in the United States economy cut demand and raised inventories. We’ve probably hit a new high plateau for oil prices, between $40 and $80.

We feel conservative investors should have only modest commitments in oil and gas stocks. They should focus on well-established companies, such as these three. Their large reserves and diversified operations will let them profit from higher prices, and help shield them from the inevitable downturns.

IMPERIAL OIL LTD. $42 (Toronto symbol IMO; Conservative Growth Portfolio, Resources sector; SI Rating: Average) is Canada’s largest oil company, with major operations in Alberta and the Northwest Territories. Oil accounts for over 70% of its production, while natural gas supplies the other 30%. Imperial also refines crude oil into gasoline and other petrochemicals, and operates over 2,000 gas stations under the “Esso” banner. ExxonMobil Corp. owns 69.6% of the stock.

In the three months ended September 30, 2006, Imperial’s revenue fell 13.6% to $6.65 billion from $7.7 billion a year earlier. Overall oil production grew 12% due to rising output at its oil sands facilities, but conventional oil and natural gas volumes fell. Despite the lower revenue, income rose 31.3%, to $0.84 a share (total $822 million) from $0.64 a share ($652 million). That’s because the company earned higher profits from heavy oil and chemicals than from conventional oil and gas. Cash flow per share rose 60.9%, to $1.11 from $0.69.

Imperial is Canada’s largest oil sands operator. It owns 25% of the massive Syncrude joint venture, and runs it. It also owns its own oil sands project at Cold Lake, Alberta. These operations accounted for 71% of its third quarter crude oil production.

The company now plans to spend roughly $5 billion on a new oil sands project at Kearl Lake, Alberta. Imperial will own 70% of this project and operate it; ExxonMobil will own the remaining 30%. Imperial aims to start work on Kearl Lake in 2007, and begin initial production three years later. This first phase could increase its daily oil output by one third.

Imperial still hopes to build a pipeline that would transport natural gas from the Mackenzie Delta to Alberta. The company estimates the cost at $7.5 billion, but that could grow to $10 billion due to rising costs for steel and labour. Regulatory delays and falling gas prices have also hurt the potential profitability of this project. Imperial is now looking at other ways to transport the gas, including cooling it to a liquid form and shipping it by tanker.

The stock trades at 14.9 times its likely 2006 profit of $2.81 a share, and at 11.6 times forecast cash flow of $3.61 a share. The $0.32 dividend yields 0.8%.

Imperial Oil is a buy.

PETRO-CANADA $50 (Toronto symbol PCA; Conservative Growth Portfolio, Resources sector; SI Rating: Average) operates major oil and natural gas projects in Western Canada and Newfoundland. Canada accounts for 75% of its total production. Petro-Canada has expanded its international presence in the past few years, and now gets 25% of its production from the North Sea, Algeria and Libya.

Oil accounts for roughly two-thirds of total production, and natural gas accounts for the remaining third. It also operates refineries, and a nationwide chain of over 1,300 retail gas stations.

In the third quarter of 2006, earnings before unusual items fell 8.1%, to $1.13 a share (total $564 million) from $1.23 a share ($638 million) a year earlier. The company had to shut down its Terra Nova offshore oil platform near Newfoundland for repairs, and production in the latest quarter fell 6%. (Petro-Canada owns 34% of Terra Nova and operates it.) However, higher oil prices raised cash flow per share 12.4%, to $2.17 from $1.93. Revenue grew 10.6%, to $5.2 billion from $4.7 billion.

Repairs to Terra Nova will cost Petro-Canada $77 million. But these upgrades will improve the long-term reliability of this asset. When it returns to service in the fourth quarter of 2006, Terra Nova should account for roughly 10% of Petro-Canada’s total daily production.

The company also has high hopes for its new offshore platform in the North Sea’s Buzzard field. Petro-Canada has a 29.9% interest in Buzzard, which should reach full production in late 2007.

Another area of growth for Petro-Canada is its oil sands developments in Alberta. It owns 12% of Syncrude project, as well as its own development at MacKay River. It recently acquired 55% of the planned Fort Hills oil sands field. The company is still examining the costs of this project, but hopes to begin production in 2011.

Offshore and oil sands projects are more expensive than conventional projects. But Petro-Canada’s strong cash flow, particularly from its refineries and gas stations, should help it cover these costs. Its experience running similar facilities will also help keep costs down.

Petro-Canada offers better value than Imperial Oil, partly due to Ottawa’s 20% limit on the amount a single investor can own, which rules out takeover possibilities. The stock now trades at just 12.2 times its likely 2006 earnings of $4.10 a share, and 7.4 times forecast cash flow of $6.80 a share. The $0.40 dividend yields 0.8%.

Petro-Canada is a buy.

ENCANA CORP. $57 (Toronto symbol ECA; Conservative Growth Portfolio, Resources sector; SI Rating: Average) produces oil and natural gas, mostly in the western part of North America. Natural gas accounts for three-quarters of its production.

In the past few years, the company has focused on unconventional gas reserves in the Rocky Mountains. These discoveries initially cost more to develop than conventional reserves. But they could last decades longer, particularly as new technology helps EnCana extract more gas. In fact, EnCana estimates that its unbooked reserves are 1.3 times the size of its proved reserves.

The company also wants to expand its oil sands production 10-fold over the next decade, and a new partnership with U.S.-based ConocoPhillips should help it reach this goal with much less risk.

The partners will form two separate joint ventures — one in Canada to develop and operate EnCana’s oil sands assets, and one in the United States, which will operate heavy oil refineries in Illinois and Texas. Both joint ventures will operate as independent entities, and will be free to sell oil (or buy it) at the best possible price.

EnCana’s earnings from continuing operations in the three months ended September 30, 2006 shot up to $1.63 a share (total $1.3 billion) from $0.40 a share ($348 million) a year earlier (all amounts except share price in U.S. dollars). If you exclude one-time items, earnings grew 63.8%, to $1.31 a share from $0.80. Cash flow per share rose 4.5%, to $2.30 from $2.20, while revenue grew 30.0%, to $3.9 billion from $3.0 billion.

Due to rising uncertainty over energy prices and project costs, EnCana plans to scale back capital spending in the next few months. It will use any excess cash to buy back stock; it spent $3.0 billion on buybacks in the first nine months of 2006.

The stock has moved down lately with energy prices, and now trades at 12.8 times the $3.96 U.S. a share it should earn this year. It’s also attractive at just 6.1 times projected cash flow of $8.28 U.S. a share. The $0.40 U.S. dividend yields 0.8%.

EnCana is a buy.