The drop in share prices, combined with uncertain oil prices, have put a bull’s eye on about two dozen large U.S. producers and close to 100 small exploration and production (E&P) companies, which may be targets for consolidation, according to a new report by IHS Inc.

The IHS Herold Oil and Gas Perspectives Report, issued on Monday, used London’s Alternative Investment Market (AIM) Index and the Standard and Poor’s (S&P) Index to analyze how uncertain oil prices, combined with falling share prices, were compromising a long list of E&Ps.

“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 IHS’s Robert Gillon, who directs energy company research. “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.”

About two dozen large (market capitalization $5 million to $3 billion) U.S. E&Ps may be ripe for consolidation as well, he said. “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.”

It’s probably “not a coincidence,” he said, that the AIM-listed stocks peaked at about the same time as the financial crisis in Greece, while the U.S. companies began to slide after oil prices topped out in April. On Aug. 4 “both indices took a serious hit, with the London group down 9.6%, while the S&P index shed 7.8% and both have suffered further losses since then.”

According to the report, the AIM index now is down by 40% from its recent peak, “which means the average company would need to sell almost 70% more new shares to raise the same amount of money as it did a few months ago.” Meanwhile, the “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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