As independents buy and sell in 2014, the forces driving A&D activity seem to be different, said Evan Calio, an analyst with Morgan Stanley, in a recent report.

Calio argues that a large part of May’s deals was about a change in attitude on both sides of the table. Buyers are seeking depth in inventory. Sellers are likely to be in restructuring mode.

Years of inventory are surpassing reserves and production as the bellwether for re-investment risk and stock value, he said.

“Unprecedented inventory visibility in unconventional has driven wider valuation variance among E&Ps,” Calio said.

Calio said May’s buyers looked for inventory longevity.

The Buyers

Sanchez Energy (NYSE: SN) paid $639 million for Shell’s 106,000 net acres and 24,000 barrels of oil equivalent per day (boe/d) in the Eagle Ford. The banner headline: Sanchez doubled its proved reserves and production.

Panhandle Oil and Gas Inc. (NYSE: PHX) acquired 16% of non-operated Eagle Ford working interest on 11,000 gross acres for $80.4 million. The assets include 58 producing wells (52 Eagle Ford, five Pearsall, and one Buda), six Eagle Ford wells being completed and 113 undeveloped Eagle Ford locations.

In early May, Encana Corp. (NYSE: ECA, TO: ECA) spent $3.1 billion to buy 45,500 net acres in the Eagle Ford and 46 Mboe/d as it transitions to liquids. Previously, it had sold Wyoming and East Texas assets for $2.3 billion.

Bonanza Creek Energy Inc. (NYSE: BCEI) nearly doubled its position in the Wattenberg after announcing it would pay $175.5 million in cash and issue up to 1.1 million shares of stock for about 34,600 net acres and net production of approximately 700 boe/d, 85% of which is oil. Calio noted the acquisition gives BCEI 70,000 net acres and inventory of 10-15 years of growth.

Triangle Petroleum Corp. (NYSE MKT: TPLM) increased inventory 70% in what one analyst called a “decent area” of the Williston Basin in two acquisitions totaling 46,100 net acres. The acquisition increases its second-half 2015 production estimates by about 9% to 12 Mboe/d from 11 Mboe/d.

Triangle will pay $120 million for acreage in Williams County, N.D., and Sheridan County, Mont.

The Sellers

Recent sellers, Calio argues, let go of assets for realignments.

Hess Corp. (NYSE: HES) announced May 22 it had sold its retail business to Marathon Petroleum Corp. (NYSE: MPC) for $2.874 billion. Marathon will pay $2.37 billion cash, an estimated $230 million in working capital and $274 million in capital lease assumptions.

The proceeds will fund increased buyback of stock, at up to $6.5 billion, as Hess transforms to a pure play E&P.

Encana is also parting with its royalty business as part of its plans to grow total liquids production by 30% from 2013. The Canadian royalty interest will conduct an IPO for Prairie Sky, which includes approximately 5.2 million acres of fee simple mineral title lands in central and southern Alberta with petroleum and/or natural gas rights.

In the next few years, Calio thinks inventory and valuation disparities will become the primary driver of E&P consolidation, especially as “free cash flow profiles change, inventory depletes and the discovery phase of U.S. unconventionals tappers.”

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