Merger and acquisitions activity in the energy industry in 2001 should easily beat this year's number of deals, according to PricewaterhouseCoopers. Much of the activity will be among independents seeking the advantages of size, but the firm also expects at least one more megamerger announcement in the next 12 to 18 months. Why will 2001 be a banner year? For one thing, some companies just aren't seeing the high oil and gas prices reflected in their stock. Those underachievers are prime targets for companies that are enjoying the rewards of high share prices. Secondly, small-capitalization companies are vulnerable to price volatility and may be picked off by larger independents. What's in it for the buyers? Many large independents may find it difficult to compete against the majors for high-risk/high-return international projects. Also, institutional investors are focusing on the type of consistent returns that can only be delivered by very large companies, according to PricewaterhouseCoopers. Third, the weak Canadian dollar means that small- to midcap companies there may be bought by American independents looking for natural gas opportunities. "This is a wild time for the oil and gas sector," says Rick Roberge, head of transaction services for PricewaterhouseCoopers. "It's no wonder that CEOs are looking to play the M&A card." Of course, this all begs the question of which companies may enter the fray in 2001. In the wake of the Stone Energy-Basin Exploration merger (for more on this deal, see "Making a Bigger Splash" in this issue), analysts at CIBC World Markets pointed out a few independents that are undervalued in comparison with what Stone is offering-$2.08 per thousand cubic feet of gas equivalent for Basin's proved reserves and other assets. CIBC analysts pointed to six companies whose share prices are distinctly less than what would be implied if their assets were valued at $2.08 per Mcfe. (See chart.) "This is just one measure," says CIBC analyst R. Michael Villarreal. "But it's an interesting way to look at things." Of course, merging isn't for everyone. Small independents that grow too large will be shunned by investors looking for solid-growth opportunities, according to PricewaterhouseCoopers. "Bottom line: companies need to choose between earnings or growth, and must know when they cross that line; their strategy depends on it." -Jodi Wetuski