The announced merger of Kerr-McGee Corp. and Westport Resources Inc. is not likely to spur a lot of merger and acquisition (M&A) activity among producers, RBC Capital Markets said in new Oil & Gas Exploration and Production report.

RBC analysts reviewed the details of the Kerr-McGee announcement on Wednesday and concluded that there would not be a rash of M&As within the sector like the number that occurred a few years ago.

“We will likely see a few additional transactions since companies have free cash flow and better balance sheets, but we do not expect much activity out of the ordinary,” the RBC analysts found. The report added, “There are not a lot of bargains to be had.”

RBC’s report noted that producers may be “enjoying cash flow because of the strong commodity prices, but they may not be willing to sell at this time.” It added that “managements frequently like being managers of publicly traded companies and may not be so willing to give up their positions.”

Already, said the analysts, a lot of consolidation has occurred within the exploration and production (E&P) sector, “so the menu of acquisition targets is not as big as it used to be.” The report also noted most of the E&Ps that RBC covers “have historically liked to buy asset packages rather than whole companies.”

For Kerr-McGee, its merger with Westport is a “company-specific” acquisition. Analysts noted that Kerr-McGee bought HS Resources a few years ago and “got good, low risk Rockies assets.” The Westport transaction “gives them another good, low risk” set of assets in the Rockies with upside assets in the Gulf of Mexico and along the Gulf Coast.

Even though RBC does not see a flurry of acquisitions, it does see a few attractive takeover targets. Included in its large- and mid-cap E&Ps, RBC said Tom Brown appears to be the “most attractive” because it is a “good Rockies-focused company with significant upside potential.” Among the larger E&Ps, RBC analysts said “though not a likely acquisition target, Apache remains our favorite.”

Of the mid- and small-cap E&Ps, “we think Evergreen Resources has significant growth potential and is the most undervalued.” However, because it trades at “premium multiples…as an acquisition candidate, it would likely have to be acquired by a much bigger company that could absorb the dilution.” Other mid- and small-cap E&Ps considered by RBC to be “good acquisition candidates” are Spinnaker Exploration Co., Remington Oil & Gas Corp. and Penn Virginia Corp.

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