Despite recent merger by Shell, Deloitte’s Melinda Lee “doesn’t expect an avalanche of deals” this year. (Photo: AP)

Historically after oil prices have taken a dive, driving down the price of oil stocks, a boom in merger activity follows. Weaker companies pair up with stronger ones in order to survive in some fashion, and stronger companies buy weaker ones because that’s a relatively cheap way to increase reserves and production.

Royal Dutch Shell’s $70 billion takeover of the BG Group (BRGYY), announced last week, is an example of this synergy. Shell (RDS-A) gets a bigger stake in the natural gas market, where it wants to expand, at a time when oil prices remain about half of what they were a year ago, while BG gets a 19% stake in the new, combined company, and, according to CEO Helge Lunch, becomes better positioned to “develop growth projects” already in its portfolio.

But it may be too soon to say if many more merger deals in oil and gas will be done this year.

A recent Brunswick Group survey of bankers, lawyers, private equity investment managers and analysts specializing in the energy sector found that although more than half of the respondents expect increased M&A activity in the sector this year the forecast wasn’t shared by all players. Sixty-eight percent of analysts and investment managers expected more M&A activity, but only 20% of bankers and lawyers did.

Melinda Yee, who leads Deloitte’s Oil & Gas Merger and Acquisition Transaction Services practice, says Deloitte “has been anticipating more consolidation” in the oil and gas sector but the stats for the first quarter this year show activity is down for prior years dating back to 2009. She “doesn’t expect an avalanche of deals” this year, though more are expected.

Valuation has been holding back deals, according to Lee and other investment bankers and analysts. Buyers and sellers are seen far apart on price.

What happens next will depend upon the individual parties, especially the sellers, says Yee. “They may be fine with debt loads today. But as they look to the future if oil prices don’t increase, that debt may have more of an impact on pricing and bottom-line results.”

Shell’s acquisition of BG values the gas company (formerly known as British Gas) at a premium of roughly 50% to its closing price on April 7, the day before the deal was announced. The deal also assumes a Brent crude oil price of $67 per barrel in 2016 rising to $90 per barrel between 2018 and 2020. Brent, which is extracted from the North Sea, is currently trading near $58 per barrel – about $5 more than the price of U.S. West Texas intermediate (WTI) benchmark.

Oil prices overall are now about $10 a barrel above their recent lows, which could help increase M&A activity in the energy sector. The price rise makes it “easier to find a meeting of the minds between buyer and seller on an appropriate value,” says Stewart Glickman, group head of energy equity research at S&P Capital IQ.

One prominent name among the potential buyers is Exxon Mobil (XOM), the largest U.S. oil company and itself a product of a mega-merger completed in November 1999.

“Given XOM’s $300B Treasury shares, no acquisition is too big,” Oppenheimer & Co. senior energy analyst Fadel Gheit wrote in a recent industry update. Exxon CEO Rex Tillerson has said the company is open to acquisition opportunities with attractive valuations. Gheit expects M&A activity will accelerate in the oil and gas sector barring a sharp rebound in oil prices well beyond the $65 to $75 a barrel range he’s expecting. Above that range sellers presumably may choose to hold tight.

Other names circulating as potential acquirers include Occidental Petroleum (OXY), EOG Resources (EOG) and Statoil ASA (STO).

As for acquisition targets, they would have weak balance sheets showing a significant amount of debt, says Stephen Schork, editor of the Schork Report, which follows the daily energy market. “Companies that are heavily leveraged will continue to be vulnerable,” says Schork, adding that natural gas producers especially will be in demand. “Big oil wants to transition to big gas because it’s a more environmentally [friendly] fuel, abundant and costs less to get out of the ground relative to oil,” says Schork.

Glickman wouldn’t name any specific target companies but said Pioneer Natural Resources (PXD) and Energen (EGN) are among those with the “worst prospects” for remaining independent. Pioneer Natural Resources has negative cash flow and Energen, though trading in line with its industry group, “loks to have inferior returns in 2016 and cash flow generation,” said Glickman. Other names circulating as takeover targets are Whiting Petroleum (WLL), which has already put itself up for sale; Continental Resources (CLR); Apache Corp (APA); Devon Energy (DVN); Anadarko Petroleum (APC); and U.K.-based Tullow Oil (TLW.L), Enquest (ENQ.L) and Gulf Keystone Petroleum (GKP.L).

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