Britain’s North Sea is set for another wave of consolidation as junior companies look for finance to take projects to production, says broker Westhouse.

The North Sea has traditionally been an incubator for junior oil and gas explorers even though it is now one of the world’s most mature oil producing areas.

And the current fiscal and equity/debt capital markets environment, together with the oil price setting, will be the catalyst for a third age of consolidation, says the broker.

It argues this process has already begun with the recent acquisitions of Agora Oil & Gas and Nautical Petroleum by Cairn Energy and will primarily be driven by the opportunity to acquire de-risked assets at dislocated equity market valuations.

“Coupling these factors to a robust oil price environment and material tax losses accumulated as a result of project investment, the economics of reserves acquisition via the corporate route can outweigh the high-risk, capital intensive, route of reserves addition via the exploration drill-bit,” Westhouse said.

It has applied a scoring system to junior E&P companies operating in the North Sea to identify the most likely acquisition targets.

The broker’s favourite pick is Enquest, followed – in order of their acquisition appeal – by Faroe Petroleum, Ithaca Energy, Valiant Petroleum and Antrim Energy.

Enquest’s acquisition of a 60% stake in the Kraken heavy oil field and subsequent reclassification as 2P reserves upon field development will double Enquest’s 2P reserves to 205mmboe.

This offers investors one of the largest degrees of risked upside, says Westhouse, which has started coverage with target price of 178p per share and ‘strong buy’ recommendation.

Faroe’s second place derives from a strong balance sheet cash position and its material production, which yields some of the most attractive EV/production and EV/2P reserves multiples among the North Sea E&P groups. Its share price is closer to the target of 162p.

Ithaca Energy scores lower because of a weaker oil price and production problems on the flagship Athena project. It scores lower than its competitors on appraisal and exploration upside. The target price is 165p per share.

Valiant’s fourth place ranking is courtesy of a weaker first half 2012 balance sheet than its competitors and a relatively poorer exploration track record of late, though it scores well on a discount to NAV.

Antrim Energy is being heavily discounted over the Fyne field development, which remains a major risk for the company.

Despite this risk, Westhouse says Antrim still offers investors material potential upside among the universe of North Sea stocks due, in part, to its exploration portfolio.

The company’s potential acquisition score should improve on commencement of production from the Causeway field and Antrim gets a ‘strong buy’ recommendation and target price of 70p per share.–49081.html