Oil prices are set to rise to US$75 a barrel in 2017 and the sector is set for a wave of takeovers, a broker said on Monday.
The crude price will remain relatively stable in the short-term amid sustained global supply glut and weakening economic demand from key importers in Europe and Asia, according to Cantor Fitzgerald.
On Monday, the price of a barrel of Brent crude had lifted 1.4% to US$45.5 and US light crude rose 1.5% to 42.35, having fallen from more than US$100 a barrel since late last year.
Prices rose ahead of a meeting of Middle East oil cartel OPEC this week, although its members are not expected to change output policy.
But OPEC's stance of resisting production cuts will be short-lived due to the tax economics of the cartel's members, Cantor said.
It added that US and other emerging Western net exporters could withstand to some extent the economic pressures of lower revenues in the energy industry.
Cantor said it believed the oil price would rise to US$65 a barrel in 2016 and US$75 a barrel in 2017.
The broker also forecast more merger and acquisition in the activity as big operators keen to replenish reserves take out smaller and weaker rivals.
Cantor said that overall, UK equities in the oil & gas sector contracted a further 30% in 2015, with more pronounced valuation declines of up to 34% in the equipment & services sector and a fall of 46% in exploration & production.
Cantor analysts said in a note: "As a result, it has become cheaper and lower risk for cash-rich operators to purchase reserves through the stock market than through exploration or appraisal.
"We therefore anticipate in the short-term, more distressed sales and opportunistic public bids for companies with strong underlying assets but limited capital availability."
The broker added that access to capital in the equity markets for small- to mid-cap exploration and production companies had waned since 2012.
That followed high-profile unsuccessful drilling campaigns, under-performing assets and the investment community’s perception of a number of “lifestyle” companies operating in the AIM market.
The Cantor analysts said: "Today we see the debt markets tighten, given the decline in project economics for producers on a global scale. Looking ahead, in the medium-term, we anticipate that new debt will come at an additional cost across the sector, and existing debt will come under increased scrutiny and increased risk of covenant breach."
Cantor said it was increasing its risk weighting on companies solely contingent on a farm-out to advance a significant proportion of its assets.
"We therefore downgrade Chariot Oil & Gas (LON:CHAR) to 'hold' and retain a 'hold' recommendation on Xcite Energy (LON:XEL)," the broker said.
"We also assess the intrinsic risks associated with highly leveraged companies, downgrading Tullow Oil (LON:TLW) to 'sell' from 'hold'.
"We initiate coverage with four new 'buy' recommendations: Hurricane Energy (LON:HUR) IGas Energy (LON:IGAS), Panoro Energy (LON:0N08), and Parkmead Group (LON:PMG)."