More consolidation likely in oil industry

Major oil companies are sitting on enormous piles of cash after posting record profits in recent quarters, while crumbling stock and crude prices have made many smaller oil and gas companies potential targets.

The disparity in the energy sector comes as Exxon Mobil Corp., BP PLC and other oil giants find it increasingly difficult to secure new sources of fossil fuels the old-fashioned way--exploring and drilling for them.

Smaller producers that don't have the same massive capital reserves have been stung by a credit crisis that's severely limited or even paralyzed their ability to finance new exploration and production.

"You have a lot of smaller producers with a lot of property, but many are constrained right now," said Brian Youngberg, an energy analyst at Edward Jones. "Then you have the major integrated companies with deep pockets that could potentially buy these reserves at relatively attractive prices. You're probably going to see this happen as we move through 2009."

In the long run, consumers could benefit if the deep-pocketed majors step in and finish some projects that might otherwise go undeveloped by smaller, struggling producers. Increased production puts downward pressure on prices.

No one predicts the mega-deals of the late 1990s, when oil fell to near $10 a barrel and the couplings included Exxon and Mobil and BP and Amoco, creating today's behemoths. But observers say consolidation is inevitable given the enormous stockpiles of capital at the ready, paired with the bargain prices for some companies.

Exxon Mobil, the world's largest publicly traded oil company, said recently it has $37 billion in cash.

At the same time, the economic downturn and a significant drop in commodity prices have erased huge chunks of market value for other energy companies, including independent oil and natural gas producers with rights to potentially oil-rich tracts of land and sea.

Independents concentrate solely on exploration and production, forgoing refining and marketing operations. Among those mentioned by analysts as possibly appealing to larger rivals are Apache Corp., Devon Energy Corp. and Chesapeake Energy Corp.