Dow Jones 8243.88 -55.04 10:40 am PST, April 9, 2003  NASDAQ 1367.77 -15.17 For info, visit access.smallcapnetwork.com S & P 500 871.06 -7.23 To be removed, please click here Russell 2000 374.11 -0.55 VOLUME 03: ISSUE 13  Got Natural Gas? Next time you're schmoozing around at a neighborhood barbecue, will you know what to answer when someone asks: "Which is the better investment, oil or natural gas?" Well, your answer should be an unqualified 'Yes'. As the interrogator looks bemused, you can then expand upon your brilliance. In the unnecessarily complex world of petroleum investing, oil is the sizzle while natural gas represents the steak. By 2020 demand for natural gas will have outstripped that for other types of resources as the annual usage is expected to balloon to around 33 Tcf (trillion cubic feet) from the 2000 figure of 23 Tcf. That'd be an increase of almost 50 percent. Since natural gas is used-more and more-- in electricity production, that means that the small increase in usage seen historically during the summer months will continue to rise resulting in a smoothing of the cyclical nature of natural gas.  Whereas usage generally spiked in the colder months and the summer months were used to replenish supplies, going forward (I hate that term) demand will cease to be cyclical; the need for the commodity will become year round. Damn Statistics  Oil prices are subject to various global geo-political events-as if I had to tell you that. Natural Gas reserves are quite robust with current estimates of 5,000-plus Tcf's globally. Of this the US has around 3 percent, while the Middle East has around 34 percent, etc. The US gets 84 percent of its Natural Gas domestically, 15 percent from Canada and the balance elsewhere. Usage breaks down to 42 percent industrial and 22 percent residential, with the balance used for other commercial entities and electricity generation.  One of the largest producers of oil and natural gas in the world is EnCana Corp (ECA: NYSE). The Canadian-based company has a $15 billion market cap and produces, per day, 3 Bcf (billion cubic feet) of gas and 250,000 barrels of oil. Further, the behemoth boasted 9 trillion cubic feet of North American natural gas and 980 million barrels of conventional oil and NGL (natural gas liquids) reserves at year-end 2002. That gives you some perspective of how the heavyweights operate.  In the weeks to come, we'll begin to investigate small cap outfits. Black Gold, Texas Tea and more of it Over the past few years, technology has played a critical role in oil and gas production. Researching this piece, I noted that Sun Microsystems (SUNW: NASDAQ) has a division that caters exclusively to the technology needs of the petroleum sector. Over the next ten years, improved technology is expected to increase world oil reserves by 125 billion barrels, and lower capital expenditures, as companies become wired to squeeze more product and savings out of their operations. EnCana will spend $3.3 billion on capital projects in 2003-flat against 2002. Better technology means, as well, that marginal fields and those in far-flung places such as West Africa become more viable. Lower costs, more production, growing market-ya gotta like that. EnCana is projected to earn $3.11 for fiscal 2003 (as at December), so with a current share price of $31.40, the price/earnings ratio is a compelling 10 times. That said, the key to successful oil and gas investment is to buy a company with a good mix of oil and gas-the sizzle and steak-that generates a good cash flow, which is the filter through which most investors view the viability of oil and gas company.  Cash Flow runs through it Always look at cash flow when considering an oil and gas investment. Encana generated $8.71 per share of cash flow--evidencing a price to cash flow (p/cf) of about 4 times. The higher the number, the greater the risk. Anything below a 5 times p/cf is very respectable. As SmallCap Digest explores the resource area, we will continue to refine our thinking and look for small cap companies that have potential to grow and flourish in the long term. Junior or small cap companies with a combination of oil and natural gas assets tend to do extremely well when matched with savvy management that aggressively exploits the latest technologies to cut costs, find new reserves and increase production. While we're on the prowl for interesting situations, if you have any resource picks you think we should look at, or any other ideas or comments on any topic, send 'em in to: editor@smallcapnetwork.com.Readers give us some of our best ideas and help us to identify those companies that will profit going forward. Damn, I said it again. D I S C L A I M E R : The SmallCap Digest is an independent electronic publication committed to providing our readers with factual information on selected  publicly traded companies. SmallCap Digest is not a registered investment advisor or broker-dealer. 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