* Starts Afren, Africa Oil, Cairn Energy, DNO with 'buy'
* Begins coverage of Dragon,
Faroe, Ophir,Soco with 'buy'
* Starts Lundin, Premier, Tullow Oil with 'reduce'
March 2 (Reuters) - Nomura began coverage of the European exploration and production industry with a 'bullish' view as it expects high oil prices to persist through the year, but urged investors to exercise caution as the sector has outperformed over the last few months.
On Thursday, Brent topped $128 a barrel in late post-settlement trade, reaching levels not seen since July 2008, when the growing economic crisis drove oil to record peaks of more than $147 a barrel.
The current spot oil price of $121 per barrel is higher than last year's average of $111 per barrel, the second-highest oil price since 1864, Nomura wrote in a note to clients.
The brokerage started Afren, Africa Oil, Cairn Energy, DNO International, Dragon Oil , Faroe Petroleum, Ophir Energy and Soco International with 'buy' ratings, terming their stocks 'underappreciated' and citing their funded, multi-well exploration campaigns.
Nomura also expects these mid-cap companies to engage in mergers and acquisitions to expand their resource base.
This could be either as an acquirer like Cairn -- which could use acquisitions to rebuild its portfolio -- or as an acquisition target like DNO, whose assets in Kurdistan make it an attractive target for major names like ExxonMobil which have recently entered the region, said Nomura.
In contrast, Nomura is more cautious on big names like Lundin Petroleum, Premier Oil and Tullow Oil as they have limited scope to add to their resource base this year.
The brokerage started coverage of Lundin, Premier and Tullow Oil with 'reduce' ratings.
The European oil and gas index was up 0.45 percent at 363.35 points on Friday morning, after touching a year-high of 363.37 earlier in the day.
(Reporting by Sruthi Ramakrishnan in Bangalore; Editing by Tenzin Pema, Roshni Menon) Keywords: OILEXPLORATIONSECTOR/RESEARCH NOMURA
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