The giant mergers may resume in 2007, according to one veteran upstream analyst. Another says de-merging may be a smarter move for some producers. While publicly held E&P companies' mantra has been grow, grow, grow, few are likely to take the tack of telling shareholders they're going to get smaller, smaller, smaller.

Bernard Picchi, analyst with Wall Street Access, says bigger deals are ahead-if only because it remains so much cheaper to buy production and reserves than to find them. "Not just that-the buyer gets the target's cash flow immediately, rather than in four to five years' time," he adds.

He cites Anadarko Petroleum Corp.'s purchase of Kerr-McGee Corp. for $67,000 per daily barrel equivalent of production, and ConocoPhillips' purchase of Burlington Resources for $78,000 per daily barrel. Meanwhile, some larger oil companies are spending more than $100,000 to find and bring each new barrel equivalent to the surface.

"The remarkable thing to me is that there have not been more mergers among major oil companies in light of runaway capital costs," he says. "Acquisitions seem a bargain." Chevron Corp. may have done the best among the big acquirers of the past 18 months: it bought Unocal Inc. for $43,000 per daily barrel, after pushing CNOOC Ltd. out of the bidding contest.

"Do the math, as they say, on publicly traded energy shares," Picchi says. Hess Corp., ConocoPhillips and other majors' stocks trade at between $30,000 and $80,000 per daily barrel.

"Given the wide gulf between the cost of building and the cost of acquiring production, not to mention the availability of inexpensive funding, it seems all but a foregone conclusion that a period of massive consolidation lies ahead in the international oil industry."

Meanwhile, Lloyd Byrne with Morgan Stanley suggests de-merging for some types of producers. "The reason you invest in E&Ps is to compound one barrel into multiple barrels. The process then needs to repeat itself. One that cannot do so at acceptable returns must consider alternatives," he says.

Compounding one barrel into many has propelled a great deal of M&A in the past. "However, in some cases today, 'de-merging' may be a more viable strategy. Split into several companies, shed noncore assets, focus investors, increase transparency, and make lower-risk singles and doubles meaningful. Magnify the skills of management." Calgary-based Talisman Energy Inc. is a prime candidate for this, he says.

De-merging can also empower employees, "making smaller discoveries and successes more meaningful again," he adds. Yet, there is a drawback to this benefit-the lack of discoveries and successes can become much more meaningful. "Sharpening operational focus implies a more concentrated asset portfolio, which would increase the repercussions of execution failures in any given region."

Larger E&P companies' stocks trade under a "conglomerate discount," in which no investor is extremely interested in every part of the companies' business, thus values some parts less than others, resulting in a lower stock price than the true value of the sum of the parts.

Yet, the benefit is that larger stocks tend to experience less volatility and have broader market appeal.

The odds are greater of much more M&A, including the resumption of giant deals, in 2007. Some producers may consider the break-up tack, but employees will go with the assets. And, recruiting and retaining talented personnel in the industry today is too challenging to purposefully send large numbers of team members away.