The uncertainty of future oil prices, combined with falling share prices on both London's Alternative Investment Market (AIM) Index and the Standard and Poor's (S&P) Index in the U.S., has made close to 100 small exploration and production (E&P) companies in the U.K. and two dozen large U.S. producers, prime targets for consolidation in order to achieve future funding, reports IHS in its IHS Herold Oil and Gas Perspectives Report.
"There are nearly 100 E&P companies listed on London's AIM, and while a number of these are small companies, numerous others have participated in apparently significant discoveries around the world that may turn into important oil and gas fields," said Robert Gillon, director of energy company research at IHS, and author of the weekly IHS Herold Oil and Gas Perspectives. "However, almost none of these AIM-listed E&Ps have reached the production stage, which means they are not yet generating revenue. Without revenue, they are dependent on future funding to continue operations. That funding can be accomplished either through additional share sales or a farm-out of an interest in their exploration licenses."
In addition to the AIM-listed companies, Gillon said there are about two dozen large (market cap $0.5 billion to $3.0 billion) U.S. oil and gas producers that could be ripe for consolidation as well. "Some of these U.S. companies are also reliant on external financing to fund their capital budgets, but all of them have developed reserves that could be sold in the very liquid transaction market."
Gillon said it is probably "not a coincidence" that the AIM-listed stocks peaked at about the same time as the Greek financial crisis, while the U.S. companies started to slide after oil prices topped out in April. On August 4, both indices took a serious hit, with the London group down 9.6 percent, while the S&P index shed 7.8 percent, and both have suffered further losses since then.
The AIM index is now down by 40 percent from its recent peak, which means the average company would need to sell almost 70 percent more new shares to raise the same amount of money as it did a few months ago. Meanwhile, optimism about future oil prices is more subdued, and the potential farm-in partners recognize that. As a result, they will demand more favorable terms on the deal. But commitments to the host government must be honored to hold the license.
"We believe there could be a wave of consolidation in the exploration sector," said Gillon. "Selling out will become the most attractive alternative."
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