"And it will continue," says Matthew Simmons, head of energy investment banking boutique Simmons & Co. International. "With high oil prices, these companies have built up their war chests, and there aren't a lot of good projects to spend it on." Yet some experts believe $50 per barrel oil may have pushed valuations too high for a lot of oil companies, who remember past busts as though they were yesterday. "Property transactions will continue, but we're going to see a significant slowdown unless oil prices break," says Fadel Gheit, a longtime oil follower at Oppenheimer & Co. Prices may return to $30 per barrel if unrest eases in the hot spots around the oil-producing world - mainly Russia and the Middle East. Such tensions have already begun to abate. "Based on the fundamentals, we continue to believe that oil prices, U.S. natural gas prices and U.S. refining margins will all average well above normalized levels," Prudential Equity Group LLC analyst Michael Mayer wrote in a recent report. "However, we also believe that all three of these key earnings and valuation drivers will fall materially over the next six to 12 months." That could generate more deals, Gheit says. "If commodity prices break, bringing high-flying stocks to a lower level, we'll see a narrowing of the expectation gap of the buyer and seller," he says. "All the independents would be cut down to size and be running for help, including Anadarko [Petroleum Corp.], Apache [Corp.], Burlington [Resources Inc.], Cabot [Oil & Gas Corp.], Devon [Energy Corp.], Kerr-McGee [Corp.], EOG [Resources Inc.] and Unocal [Corp.]." Large independent oil and gas producers will continue to look at mergers as a way to grow their companies without taking the risk at the drill bit. Several already did this past year: Houston oil explorer Plains Exploration & Production Co. acquired crosstown rival Nuevo Energy Co. for $945 million in stock and debt, Oklahoma City oil and gas explorer Kerr-McGee bought Denver rival Westport Resources Corp. for $2.5 billion in stock and $900 million in debt, and Dallas explorer Pioneer Natural Resources Co. purchased Evergreen Resources Inc. of Denver for $2.1 billion in cash and stock. Smaller oil and gas explorers also participated in the combination game. Chesapeake Energy Corp. acquired Bravo Natural Resources Inc., Legend Natural Gas LP and Tilford Pinson Exploration LLC for $590 million, and Houston oil explorer Petrohawk Energy Corp. agreed to acquire Wynn-Crosby Energy Inc. for $425 million. Right now, smaller companies active in Texas' Barnett Shale - with advanced technology and improved cost structures - are getting more attention, Prudential analyst Jason Gammel wrote in a recent report, including Chesapeake, Quicksilver Resources Inc. and XTO Energy Inc. Exxon Mobil Corp., which is the biggest player in the area, would be a likely buyer, Gheit says. But the big integrated oil companies spent the year disposing of underperforming assets. Houston oil giant ConocoPhillips Co. sold 1,180 gas stations in the U.S. to Philadelphia refiner Sunoco Inc. and Russia's OAO Lukoil for $453.1 million, while ExxonMobil shed interests in 28 mature oil and gas fields and undeveloped exploration property in the U.S. and Canada to Apache for $385 million and Royal Dutch/Shell Group of The Hague (news - web sites) agreed to sell a pipeline system to Magellan Midstream Partners LP in June for $492.4 million. Large independent oil companies also shed assets to become leaner and meaner. Houston oil explorer Anadarko sold its Gulf of Mexico shelf properties to Morgan Stanley Capital Group Inc. and Apache for $1.312 billion and a package of Canadian oil and natural gas properties to Advantage Oil & Gas Ltd. for $142 million. And Devon announced in September it planned to sell underperforming oil and gas properties in North America for $1 billion to $1.5 billion. Private equity, financial and insurance-backed firms continued to pick up energy assets, particularly power. El Paso Merchant Energy, a unit of El Paso Corp., sold its 25 U.S. power plants to a unit of AIG Highstar Generation LLC and AIG Global Investment Group for $746 million and $174 million in debt. Columbus, Ohio, utility American Electric Power Co. shed its stakes in four independent power plants in Colorado and Florida to affiliates of Bear Stearns Cos. for $156 million. And Boston private equity firm ArcLight Capital Partners LLC acquired an Illinois power plant from Greensburg, Pa., utility Allegheny Energy Inc. in September for $173 million. High oil prices even created competition for deals. Goldman Sachs Group Inc. bought interests in 12 power plants and a natural gas pipeline from Bethesda, Md.-based power producer and pipeline operator National Energy & Gas Transmission Inc. last September for $656 million, trumping a $558 million offer from ArcLight and New York power producer Caithness Energy LLC. More power plant assets are on the block. Royal Dutch/Shell is shopping international power plant developer InterGen for a reported $6 billion (Shell owns 68%; Bechtel Corp. owns 32%). But some observers are worried that the private equity power feast may be over if valuations don't improve soon. "These private equity players are betting on improving market conditions alleviating the current lack of demand for electricity," says Gary Hunt, president of analysis firm Global Energy Advisors. "A delay in recovery of a couple of years will destroy their returns and result in the same assets being sold in a few years' time." Some private equity firms are finding ways to monetize their assets. ArcLight, for example, bundled 15 of its acquired power plants together under the Atlantic Power Corp. name and spun them off in a Canadian initial public offering in November, raising $320 million. Utilities also re-entered the M&A market. One of the biggest deals was St. Louis-based Ameren Corp. buying Decatur, Ill., electric and natural gas distribution and transmission company Illinois Power Co. in February from ailing Dynegy Inc. for $2.3 billion in cash and debt. Dallas natural gas distributor Atmos Energy Corp. agreed to acquire TXU Gas Co. from Dallas utility TXU Corp. in June for $1.92 billion in cash, while Atlanta natural gas distributor AGL Resources Inc. bought Bedminster, N.J., natural gas distributor NUI Corp. for $220 million in cash and $607 million in debt. But despite the weak dollar, European utilities have been reluctant to jump into the U.S. utility market (there are even rumors Germany's E.ON AG is looking to sell LG&E Energy LLC, which its predecessor acquired in 2000 for $3.2 billion in cash). One exception: U.K. power giant Centrica plc, which paid $277 million for two power plants in Texas to fuel its Direct Energy power distribution business and rely less on buying electricity on the open market. With fears of oil and power supplies dwindling, high-tech energy deals were also hot. Reading, Pa., industrial battery maker EnerSys, for example, raised $156.3 million in an IPO. And fuel cell developer NanoDynamics Inc. raised $12 million in private equity funding. A sign that oil prices may be headed higher? Dealmakers can only hope. PIN/THEDEAL.COM