* Smaller oil groups' shares beat majors, FTSE
* Some investors see room for further rises
* Higher oil prices boost revenues, help debt reduction
* Europe's E&P stocks beat crude, majors: https://reut.rs/2ImaUPx
* E&P vs oil sector: https://reut.rs/2wMxyvl
By Shadia Nasralla
LONDON, May 17 (Reuters) - Investors have sent shares inEuropean oil exploration and production (E&P) focussed companieslike Premier, Tullow, EnQuest and Faroe, soaring, and some fund managers say they have notpeaked yet.
Shares in smaller and mid-cap British oil companies areoutperforming the London FTSE blue chip index and theirlarger competitors, riding the wave of rising oil pricesmuch higher than oil majors.
"The sector has performed quite well, but not as well as itmight have done, we've only just started the rally," said PaulMumford, senior fund manager at Cavendish Asset Management, whois invested in Faroe, EnQuest, Tullow, Hurricane Energyand Cairn Energy and other smaller E&P groups.
"I tend not to do majors. You're not going to make ten timesyour money with BP and Shell, whereas with some of the (smallercompanies) you will do that. It's a very interesting undervaluedpart of the market."
Smaller E&P companies have direct exposure to oil prices,reflected in benchmark Brent futures which have risen by arounda quarter towards $80 a barrel in the past three months, levelslast seen in late 2014.
Morgan Stanley, which sees oil prices rising to $90 a barrelin 2019/20, said in a note this week it was "time to increaseE&P exposure", raising E&Ps' rating to attractive.
An index of 20 larger European oil and gas companies - mostof which include refining and marketing operations known asdownstream - rose by around a fifth in the past three months.
Meanwhile, pure E&Ps like Premier rose by around 60 percent,Tullow by 50 percent, Faroe by 40 percent and EnQuest by almost30 percent. An index of smaller oil and gas groups rose byaround 35 percent.
Low oil prices hit E&Ps harder than so-called integrated oilcompanies like the majors, whose downstream activities worked asa natural hedge when oil prices slumped starting in 2014.
With projects planned at a time of high oil prices, balancesheets came under pressure and debt mushroomed.
"Our sector has been unloved for a long time," said NathanPiper, who analyses mid-level oil companies for RBC. "Now theyare (loved) - with some of these companies, which people thoughtwould go out of business a couple of years ago, recovering."
When oil prices were low, cost cuts and asset sales were themain way for companies trying to juggle rising debt, operatingexpenditure and lower revenues. Higher oil prices will allowdebt piles to shrink faster - a focus for investors.
Barclays said this week that higher oil price assumptionshad led it to raise 2018-20 "cash flow and price targets acrossour coverage group, with debt-levered oil producers benefitingthe most. Current positive momentum is encouraging investors torevisit the sector."
Tullow, with debt still at $3.4 billion, announced lastmonth it swung back to profit after three years in the red, andis considering resuming dividend payments frozen in 2015.
British-based companies can carry forward tax losses,allowing groups to offset rising revenue in high-price periodsagainst previous years' losses - a double advantage for oilcompanies solely or mainly operating in Britain.
EnQuest, which is saddled with around $2 billion in debt,had corporate tax losses of over $3 billion at the end of 2017so it will most likely not pay any material corporate tax onBritish operations for "the foreseeable future", a spokesmansaid.
Premier, carrying $2.7 billion in debt, had $4 billion of UKtax losses and allowances to carry forward. It is ramping up itsCatcher oil field and looking to expand in Mexico.
Premier Chief Executive Tony Durrant told Reuters investorsare starting to realise the sector is undervalued and that hesees rising interest from generalist fund managers:
"Investor sentiment towards the sector is only justrecovering. We were hit very hard on the downturn because wewere leveraged. The logic is we've got further to go on the wayback up. Over the coming weeks you'll see some disclosableinterest from some quite large institutional shareholders."
But some investors are more reserved. Allianz energy analystRohan Murphy said he would like to see E&P companies' valuationsunderpinned by more mergers and acquisitions and oil futuresprices going up to signal the oil price rally has longer to run.
(Additional reporting by Helen Reid; Editing by Adrian Croft)
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