(FORTUNE Magazine) – For the past year, hydrocarbons have provided most of the market's energy. While the Dow Jones industrial average has been essentially flat and the S&P 500 has inched up just 5%, since March 2004 the Amex oil index is up more than 40%. And the action has only intensified of late. A surge in prices has pushed the Oil & Gas Journal 200 index 20% higher since January.

If oil and gas prices keep rising, of course, the whole sector will benefit. But most of the easy money has probably been made in the stocks of integrated oil giants such as Exxon Mobil--and those stocks are certain to tumble if prices dip. A better strategy for investors who want to get in on energy is to take a look at a handful of smaller companies with reasonable valuations in three fast-growing--but niche--areas of the conventional oil business.

For starters, take Kazakhstan. Really. The former Soviet Union is the only non-OPEC area in the world where oil production is increasing right now. In Kazakhstan, production has doubled since 1998. And with proven reserves of nine billion barrels, there is still room for it to grow. Some experts believe the country could triple its output by 2015. Moreover, Kazakhstan and China recently agreed to build a pipeline to ship crude. Scheduled to open in 2006, the pipeline will reduce the cost of getting oil from Central Asia to market and improve Kazakhstan's competitive position.

One of the biggest beneficiaries of the region's emergence should be PetroKazakhstan (PKZ, $36). Formerly known as Hurricane Hydrocarbons, the Canadian company owns productive fields in Kazakhstan's South Turgai Basin and operates a refinery that serves half of the country's needs. Revenues last year rose by almost half and profits by almost 60%. But what makes PetroKazakhstan really stand out is its puny P/E ratio of less than six (the industry mean is 15). Why so low? Probably because Central Asia scares people. Neighbor Kyrgyzstan, for instance, just sacked its President amid political turmoil. This is one instance where a little risk could lead to a big gain.

A second promising trend is "unconventional" gas, or gas that is difficult to get at and has to be coaxed out of coal-beds, tight sands, or fractured shales. Given diminishing production of conventional gas and prices that are sticking at high levels ($6 per thousand square feet), the environment for unconventional gas is good. World demand rose an average of 14% from 2000 to 2003.

Two companies well placed to take advantage of that demand are Burlington Resources (BR, $50) and Devon Energy (DVN, $46). "They have incredible financials," says Fadel Gheit, energy analyst at Oppenheimer in New York City. "They are printing money."

Burlington's unconventional assets are diverse, and the company is a tight ship. Its return on assets (10.8%) is higher than the industry average (8%), as is its revenue generated per employee ($2.5 million vs. $2.1 million). In a year that was very good indeed for energy, Burlington did even better: Its net profit margin of 27.2% was much higher than the industry average of 17%.

Devon may have even more growth potential. Its reserves have nearly quadrupled since 2000, to 3.7 trillion cubic feet (more than a tenth of annual U.S. consumption). Given that it is the largest leaseholder in the gas-rich Barnett Shale in Texas, that percentage may well fatten. "We see our exposure growing over time," says president John Richels. With a low debt-to-capital ratio and $1.7 billion in free cash flow, Devon has the money to follow its hunch.

Then there is EnCana (ECA, $69). Based in Calgary, Canada, EnCana has restructured to concentrate on unconventional gas. Since unconventional gas makes up only about 10% of Canadian output (compared with a third in the U.S.), EnCana may be a chance to get on the bandwagon early.

Finally, investors thinking very long-term should investigate gas-to-liquids technology. In GTL, natural gas is converted to finished oil products. The advantage of GTL is that it allows "stranded" gas--assets that can't be accessed by pipeline for reasons of size, geography, or politics--to get to market. Right now it is a boutique technology, so an investor has limited options. The best bet is probably Sasol (SSL, $25), a South African company (2004 revenues: $10.6 billion) that is putting serious money into GTL. Over the next ten years, says CEO Pieter Cox, half of the company's growth will be in gas-to-liquids. For Exxon and the majors, GTL is an intriguing idea but still a backwater; for Sasol, says Cox, "this is our Main Street." A new plant in Qatar is in the works, and a plant in Nigeria, approved April 8, will use Sasol technology. That puts Sasol well ahead of the pack.

Drilling for value

These companies have reasonable valuations and good growth prospects.

[This article contains a table. Please see hardcopy of magazine or PDF]

¹ As of April 12, 2005.  ² Based on past 12 months' earnings.