By Daniel Hunter

Drilling successes saw 2011 end on a positive note for junior oil and gas companies, but ever tightening credit markets mean they remain vulnerable to takeover by their larger peers, according to the latest Ernst & Young Oil and Gas Eye.

The index — which monitors the movements of AIM-listed oil and gas companies — may have risen by 24% in the final quarter of 2011, but its performance over the year as a whole was disappointing; it ended the year 22% lower than at the start of 2011 compared to the gains of 123% and 47% made in 2009 and 2010 respectively.

Secondary fundraising dips as credit markets tighten

The eurozone debt crisis continues to cast a shadow over equity markets, with the absence of a long-term solution eroding investor appetite for European risk.

Just 15 AIM-listed oil and gas companies (13% of the universe) successfully raised funds in the fourth quarter of 2011, while the £1 billion raised across the year was 47% less than the 2010 figure.

Larger companies preparing to flex their financial muscles

Jon Clark, oil and gas partner at Ernst & Young, believes this points to further mergers and acquisitions (M&A) activity in the space.

“Many junior oil and gas companies are going to find fundraising — whether debt or capital — increasingly challenging,” he said.

“Those seeking to deliver on exploration and development projects have to consider a broad range of options. All the while, well-capitalised majors and National Oil Companies (NOCs) will be eyeing opportunities to exploit their balance sheet advantage.

“The global oil and gas arena averaged three transactions per day in 2011, so difficult funding dynamics should result in it remaining a hotbed of M&A activity for much of 2012."

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