Two merger deals among smaller oil and gas explorers in less than a week have put a spotlight on a portion of the red-hot energy sector where bankers and analysts say more transactions are in the works.
Petrohawk Energy Corp said it would pay $1.6 billion in cash and stock to acquire KCS Energy Inc, and Plains Exploration & Production Co set a plan to acquire Stone Energy Corp for about $1 billion in stock.
Both deals are relatively small in terms of the energy universe, especially compared to ConocoPhillips' $34 billion purchase of Burlington Resources, which closed in March.
Strong stock and commodity prices, the need to grow reserves and mounting costs of running energy operations are among the reasons small companies are looking for partners, bankers said.
With industry valuations strong, there are many small companies hoping to do deals, but whether they have the growth prospects to justify their prices is another question, one banker said.
"There are a few companies out there along the lines of KCS - companies that have asked bankers to go out and talk to buyers quietly," said Stephen Trauber, global head of energy for investment banking at UBS Securities.
Privately-held natural gas explorer Four Sevens Oil is one company that might be sold. It hired Houston firm Simmons & Griffis as advisors and opened a data room two weeks ago to multiple interested buyers, Four Sevens Oil partner Larry Brogdon told Reuters.
Chief Oil & Gas, a private Dallas-based company, has also said it is up for sale. The United States' largest independent oil and gas company Devon Energy Corp has expressed interest in the company, which is expected to go for $1 billion to $2 billion.
There have been a host of other deals this year in the sector, including the sale by oil and gas company Kerr-McGee Corp of $1.34 billion in Gulf of Mexico properties to W&T Offshore Inc, Cal Dive International Inc's $1.4 billion plan to buy Remington Oil and Gas Corp, and oil and gas explorer Pogo Producing Co's plan to buy Latigo Petroleum for $750 million.
While the deals so far have been among like-sized companies, it is possible that one of the larger independents interested in increasing reserves and production could be interested in buying a small company, as long as it has growth potential, bankers said.
Dealmakers said the merits of small deals rest at least some part on cost synergies, as the newly larger companies can better deal with the exploding costs of energy production.
"I think there are certain benefits to size, especially when you combine two public companies - you have some savings of having one public company versus two and there are also some economics of scale that come from applying a combined capital budget to a combined set of opportunities," said Jon Hughes, Co-Head of Investment Banking at energy banking firm Petrie Parkman & Co.
"So there is a natural efficiency that you pick up as you can prioritise capital across a bigger set of opportunities," Hughes said.
Companies are also increasingly concerned about shortages in arranging for oilfield services, according to Andrew Safran, Global Head of Energy, Power and Chemicals at Citigroup.
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