In a down cycle, every E&P is a potential buyer for the right asset.

Deal-closers are another story entirely.

The last major period of energy mergers and acquisitions (M&A) stretched from 1997-2001 and created many of the supermajor oil companies. In 2006, another faltering market brought more consolidation.

But every M&A cycle is different and this one is no exception, said Evan Calio, executive director of equity research, Morgan Stanley & Co. LLC, in an April 10 report.

E&Ps have huge amounts of money to buy and financing is at their fingertips; yet, they may lack interest in all but the best acreage. Sellers are entrenched and will need a lot more pressure before they’re ready to lower prices. More likely, the industry supermajors will look to take the pot, according to the report.

Since April 8, when Royal Dutch Shell Plc (NYSE: RDS-A, RDS-B) announced the acquisition of BG Group Plc for $70 billon, speculation has ramped up about who make the next big move.

ExxonMobil Corp. (NYSE: XOM) and Chevron Corp. (NYSE: CVX) are the obvious choices. They both perform well, have access to inexpensive financing and a strategic need for large production portfolios, Calio said.

But many experts say the Shell/BG deal is unlikely to push companies or relatively smaller E&Ps to do deals. To be sure, interest is picking up. Acreage in a down market is beginning to look tempting. Oil is 50% off 12-month highs and many expect a meaningful recovery in six to 18 months with longer-term views ranging from $70 to $85 per barrel (bbl) of Brent.

And many U.S. large-cap companies have said they want to add to their unconventional portfolios.

For years, U.S. E&Ps have been trimming their portfolios internationally to move into U.S. resources.

On April 8, Apache Corp. (NYSE: APA) said it would sell its Australian subsidiary to a consortium of private equity funds managed by Macquarie Capital Group Ltd. and Brookfield Asset Management Inc. (NYSE: BAM) for $2.1 billion. Several days earlier, on April 2, Apache said it had sold its Wheatstone LNG project and related oil and natural gas properties to Woodside Petroleum Ltd. for $2.8 billion.

In the midst of E&Ps exiting overseas, oil prices fell to the deep end. The result is that many companies are flush with cash from international sales.

“The change in U.S. productive capacity, potential exposure to growth and better margin is historic. And a downturn, a break in the frenzy, could be a significant opportunity for many,” Calio said.

The more ambitious have said they will look to up their unconventional resource exposure.

They are aided by historically low borrowing costs.

“Large cap E&Ps have significantly restructured portfolios in the last four years, reorienting toward U.S. onshore as the U.S. unconventional opportunity has become defined,” Calio said. “Many E&Ps have the willingness, the capacity, and in some cases the need to make acquisitions.”

Major Buyers

The sticking point in acquisitions, as with most any deal, is the price.

Many E&Ps think bid-ask spreads remain wide.

“Recently at our Permian Basin conference, most attendees conveyed that the bid-ask spread remains wide for public and private transactions and that they do not expect material activity until the second half of 2015 or later,” Calio said.

Companies with deeper drilling inventory have a longer discount period and are generally less interested in expanding their asset base.

“Interest remains highest in tier-one acreage, but acquisitions are only accretive if they high-grade deep existing inventory,” Calio said.

Put another way, acreage that draws the most interest would high-grade a company’s existing acreage. What doesn’t make E&Ps stronger—noncore acreage—will be valued less.

“New basin entrants or private equity may be less encumbered by that discount,” he said.

The dynamic nature of unconventional assets understates their current value. Just as those assets have increased in value in the past four years, asset values are increasing on a flat oil price. The reason: improving efficiencies, completions, recoveries and more locations, he said.

E&Ps in the past five years have sought unconventional plays with an eye on opportunities of at least 4 MMbbl/d, growth potential, low costs and few geopolitical risks.

Private equity also has a role to play. The sector has raised huge funds for E&Ps with lower interest rates.

Calio said the majors remain the most likely down-cycle buyers. Potential targets and rumors of targets far exceed actual deals so far.

But during meetings with analysts, ExxonMobil and Chevron have talked about possible acquisitions and mergers.

Since Exxon trades at a premium to a number of large-cap E&Ps, an equity transaction remains possible, Calio said. The company also has the ability to borrow debt at low interest rates. Recently, the company raised $7 billion in variable maturity notes of 1.305-3.567%, securing a cost of capital advantage to global E&Ps.

“We believe offshore exposure or international assets with significant selling, general and administrative [SG&A] cost rationalizations are a better strategic fit for Exxon. North American unconventional has more strategic appeal to Chevron, in our view,” Calio said.