Small oil companies have become attractive takeover targets because they have something that oil majors like Exxon Mobil Corp. (NYSE: XOM) and Chevron Corp. (NYSE: CVX) want - expertise in the hydraulic fracking and horizontal drilling methods that are used to extract oil from North America's vast shale reserves.
And many of these takeover targets are companies based in North America.
"The main opportunities to profit from M&A (mergers and acquisitions) will be in the U.S. and Canadian markets," said Money Morning Global Energy Strategist Editor of theOil & Energy Investor Dr. Kent Moors.
Ironically, many of these small companies developed their expertise after buying assets the majors sold as soon as easy-to-reach deposits were tapped. Many of those assets contained shale oil, which is much harder and more expensive to extract.
But since the global price of oil is high enough to make shale oil drilling profitable, the oil majors have been seeking out smaller players to retrieve their assets and expertise.
"These shale prospects are exploration frontiers and the big international players see them as a runway to growth," Mark Hanson, an analyst at Morningstar Inc. told Bloomberg News.
Shale oil becomes profitable when global oil prices are in the $70 a barrel range. The higher the price of oil goes, the more attractive shale oil formations become.
The price of West Texas Intermediate (WTI) averaged about $95 a barrel in 2011, but will keep rising. Moors believes oil will reach $150 a barrel as early as this summer.
So the big oil companies, with billions of dollars of profits burning a hole in their deep pockets, have plenty of motivation to shop around.
For investors that means they need to stake out their positions before all the buying starts.
That's the only way to take advantage of the sudden jump in the stock price that occurs when a takeover deal is announced. Luckily, several oil sector analysts have already identified the most likely takeover targets.
According to Subash Chandra, an analyst specializing in energy stocks for Jeffries Group Inc., the stocks to watch are ...