The shale energy revolution was not a feat of Big Oil. Independent exploration and production companies run by little-known executives fracked their way to a stunning rise in US oil and gas output over the past decade. Big – or at least bigger – oil is set to have its day in US shale, however. Conditions suggest that E&P M&A will loom large in the early 2020s. A fragmented production system will fuse into bigger pieces. Several factors point to why. The early days of the boom were a manic time of exploring rock and issuing debt and stock. With crude prices above $100 a barrel, capital markets were obliging.

While production soared, investor returns did not. E&P companies as a group failed to cover capital spending out of cash from their operations. Now, with oil prices at $60 a barrel, investors are scarce. “Nobody gives us capital any more. That’s why consolidation has to happen,” said an E&P company chief.

Producers also need to find new locations for wells. In the booming Permian Basin of Texas and New Mexico, the average E&P has 19 years of core inventory remaining, according to Goldman Sachs. But the average drops to nine years a few hundred miles south-east in the Eagle Ford shale, suggesting production there will plateau in the next couple of years, Goldman’s Brian Singer said. Exploration is one way to rebuild inventory. Buying a company is speedier. As they become more efficient, the enterprise value of larger E&P companies is higher as a multiple of earnings compared to smaller peers, giving them currency to pursue stock-based takeovers to acquire acreage, said Matt Portillo, head of upstream research at Tudor, Pickering, Holt.

Combined companies can cut overheads. Smaller shale producers’ general and administrative costs range from $3-$4 per barrel of oil equivalent, while the better-run big ones have costs closer to $1.50 per barrel, Mr Portillo said.  “As shale has matured, we no longer need 40 to 50 publicly listed companies that are all developing unconventional assets,” said Mr Portillo, whose firm advises on energy M&A deals. “It’s really become a game of industrial scale.” He estimated 10 or 15 companies may be left after consolidation.