Those who read this column last month may recall a hope that recent bottom-of-the-barrel sentiment for the energy sector reflected conditions that were “darkest before the dawn.”

Let’s hope it was—and that recent glimmers of light truly augur better times ahead.

In April, we saw the month end with a gain of 11.8% in the XOP (SPDR S&P Oil & Gas Exploration & Production ETF). But, early in the month, it sure didn’t feel like investors were in a hurry to push their energy exposure higher. Less than swelling crowds at one industry conference prompted one research report to run a headline that read: “Where is Everybody?”

For sector specialists, it’s as if the energy sector is approaching a pivotal point, unsure whether it can—or cannot—have confidence in the steady move higher in the back half of the crude commodity curve. For much of the rest of the investor universe, energy isn’t even on the radar screen.

While the rising U.S. rig count grabs most of the headlines, offsetting factors in the demand/supply equation garner less attention. Three OPEC countries have had production declines of a combined 920,000 barrels per day (bbl/d) below the Vienna Accord baselines, noted Simmons & Co. Looking ahead, major project authorizations by non-U.S., non-OPEC countries are forecast to contribute production of just 560,000 bbl/d in 2019, down from 1.5 MMbbl/d in 2017 and 2.6 MMbbl/d in 2018, said Wood Mackenzie.

Given time, some recognition of Concho Resources’ long-term record of making accretive acquisitions has at last been reflected in the recovery of its stock price. After announcing its purchase of RSP Permian Inc. at a 29% premium, Concho’s stock—priced at $157 pre-deal—tumbled 15% over the next eight trading days. Since then, the stock has climbed its way back to finish April 30 trading at $157.20.

While it is not unusual for an acquisition at a hefty premium to result in the bidder’s stock trading lower, selloffs have historically been cushioned by shareholders stepping in to add to holdings at lower costs or to establish an initial position at an attractive entry point.

In part, the hollowing out of a base of investors in the energy sector explains the initial stock reaction to such an acquisition, according to Ben Dell, founder of Kimmeridge Energy Management Co., who previously worked on both the buy side and sell side for AllianceBernstein.

“Often, the buyer’s stock is automatically sold, because there are fewer and fewer long-only generalists who want to buy,” said Dell. “As soon as a company says it’s paying a premium for someone, the hedge fund community will automatically sell the name (short). There’s no backstop value investor to buy the name in the belief that management can execute long term.”

Dell sees a need for industry consolidation as entrepreneurial E&Ps follow a natural progression: move in, innovate, start-up, develop assets and then sell assets to larger companies with lower costs of development.

“We’ve seen small companies come in and develop assets, but not the aggregation by a scale player that becomes a dominant basin player,” he said. “I would argue the Concho-RSP Permian combination is a step in that direction, but I’d like to see several of those transactions this year to show the industry has really understood the direction in which it needs to be heading.”

Dell has proposed limited or “zero” premium acquisitions as a path for consolidation, with stocks gaining ground subsequently as combinations realize synergies, major savings in operating costs and gains from redesigned management compensation plans.

“If Concho had acquired RSP Permian at a 10% premium, the stocks would have rallied,” he ventured.

Obviously, such a trend is unlikely to gain traction overnight. “Social issues,” primarily job security, are an immediate obstacle unless management already has meaningful equity or equity-lined incentives.

However, the issue of scale is likely to grow in importance over time. The advantages of scale have already been cited in such areas as drilling longer laterals on blocked-up acreage, negotiating oilfield service contracts and affording midstream systems to handle hydrocarbon flows and produced water disposal.

As Permian Basin takeaway has tightened more quickly than some expected, another scale advantage has come more clearly into focus during E&Ps’ quarterly earnings reports. A number of E&Ps, including Anadarko Petroleum Corp., Pioneer Natural Resources Co. and Parsley Energy Inc., highlighted deals they negotiated on firm transportation, marketing agreements and hedging of basis differentials to access key hubs and export markets at favorable netback prices.

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