In early October, Devon Energy Corp. president John Richels stood up before investors at an oil and gas symposium in San Francisco and told them the bitter truth: that the credit squeeze would force many midsized players in the oil and gas industry that have great prospects but are short of cash to merge to fund their operations.

"In the past, you could always sort of squeeze up to the top of the line and know that you could go out another line tomorrow if you need it. I don't think that's the case anymore," he said. "The likelihood of consolidation is going to be higher in the next few years than it has been."

Get ready for the battle of the haves and the have-nots. With the credit crunch, ensuing financial crisis and severe drop in commodity prices, it's becoming clear which companies in the oil industry have cash to fund their development and acquisitions, and which ones don't.

"When we closed the second quarter, we had robust commodity prices, readily available credit, an equity market that was open, rig availability, a growth restraint and stocks at all-time highs. It's transformed into, 'Brother, can you spare a dime?'" says Tom Petrie, a longtime oil watcher and investment banker at Merrill Lynch & Co. "We've gotten back into a zone of rationality for possible transactions on the corporate side."

Over the past few months, the news has been littered with companies looking to do joint ventures and asset sales to keep their operations humming. Chesapeake Energy Corp. was among the first of the lot, announcing in August it agreed to sell 90,000 acres of natural gas properties in Oklahoma's Arkoma Basin Woodford Shale area to British oil giant BP plc for $1.75 billion in cash. The next month, it agreed to sell one-quarter of a natural gas-producing venture in Arkansas' Fayetteville Shale, also to BP, for $1.9 billion. It then agreed on Nov. 11 to sell a 32.5% interest in its Marcellus Shale assets in Appalachia to Norwegian natural gas giant StatoilHydro ASA for $3.38 billion.

Most recently, Delta Petroleum Corp. said it hired Merrill Lynch and J.P. Morgan to advise it on joint-venture alternatives or the sale of parts of its interest in the Piceance Basin in Colorado, where it believes it has 2.5 trillion cubic feet equivalent of recoverable natural gas reserves. "Our exploration of options and alternatives for our Piceance assets is a reaction to the market's failure to reasonably value these properties," Delta CEO Roger Parker said in a statement.

Finding JV partners and coming up with an agreeable price haven't been easy, however. Dallas oil and gas explorer Exco Resources Inc., for instance, said Nov. 6 it is no longer looking for a JV partner for its East Texas-North Louisiana and Appalachia operating areas because of market conditions. It had hired Goldman, Sachs & Co. in July to advise it. It is evaluating the sale of noncore assets and is selling some of its East Texas assets.

"There are a lot of packages out there right now, but the problem with the industry is how do you price it," says John Schaeffer, managing director and head of the oil and gas unit at GE Energy Financial Services, which recently signed a partnership with TriTex Energy LLC to buy up properties in southeastern New Mexico for cash. "Since September, it's been hard to know how much the banks will advance companies. There's a lot of equity that would like to buy the reserves, but there's no debt to leverage it. There are a lot of hung deals right now."

Michael Dillard, an attorney at Akin Gump Strauss Hauer & Feld LLP in Houston, says the situation is as bad as he's ever seen it for the oil and gas industry.

"I've never seen the combination of falling commodity prices, recession on a global basis and tight credit in my career," he says. "We're starting to see more and more companies in this industry that are having such significant issues that bankruptcy is a real possibility. Some will be able to manage through some of this, but some players who put all their eggs in one basket will not."

Some busted deals are emerging. Dallas explorer Denbury Resources Inc. announced Oct. 8 it decided not to pursue its Conroe Field acquisition in Texas from an unnamed party for $600 million because of market conditions, forfeiting its $30 million, nonrefundable deposit. The deal had been announced in August.

Development must continue in the sector, however, if oil and gas producers have any hope of meeting the world's growing energy needs, which the International Energy Agency recently estimated will reach 106 million barrels per day by 2030, versus 86 million barrels this year. The agency expects that $8.4 trillion in investments will be required to meet that need; prices by then could be $200 per barrel.

The companies that have the cash to do development-­related deals -- the global oil giants, the former seven sisters who have since combined beyond recognition -- are flush with $63 billion after benefiting from record high oil and gas prices earlier this year, according to Tudor, Pickering Holt & Co. Securities Inc. "The cash should not be burning a hole in anyone's pocket, but the disconnect between stock prices and [net asset values] is becoming staggering," the firm wrote in a recent report. "The credit crunch and market volatility is rattling and deciding on deal terms has to be a nightmare. So we'd be surprised if anything happens before year-end and surprised if something doesn't happen in 2009."

Petrie agrees. "The supermajors have been behind on focusing on resource plays, like shale and tight gas," he says. "Here's their opportunity to play catch-up or even leapfrog."

One continuing worry is that the credit crunch may also put the brakes on deals, as renegotiating credit lines for a transaction isn't easy these days. "But once the dominos start falling (like they have in past merger waves), they will keep falling," Tudor Pickering Holt wrote.

One supermajor chief executive, BP's Tony Hayward, says he is interested in picking up bargains in the oil and gas sector. "Some of them [smaller players] have been reinvesting more than 100% of their cash flow, and that's no longer possible," he said Oct. 28. "We have a good amount of firepower available, and it will increase."

Royal Dutch Shell plc is also a likely buyer. It missed out on the last round of consolidation eight years ago, when Exxon Corp. bought Mobil Corp., Chevron Corp. bought Texaco Inc. and BP bought Amoco Corp. and Atlantic Richfield Co. It also lost Barrett Resources Corp. when it failed to raise its $60 cash bid for the oil and gas explorer, which ultimately went to Williams Cos. for $73 per share, or $2.5 billion.

Shell has already spent $6.2 billion to buy North American tight gas assets -- most notably its pickup last summer of Canadian explorer Duvernay Oil Corp. for about C$5.9 billion ($4.8 billion) -- and could be looking at other companies to buy.

Some analysts think it could bid on Bill Barrett Corp., which William Barrett and his sons started after selling out to Williams in 2002. Barrett, which has a $1 billion market capitalization, has valuable properties in Utah's Uinta Basin, Colorado's Piceance and Paradox basins and Wyoming's Powder River and Wind River basins. It recently reported that its net earnings quadrupled over the first nine months of this year, to $100 million.

Like Shell, Exxon Mobil Corp. is also interested in North American natural gas production as well as the Canadian oil sands. Projects in both areas are nearing the unprofitable stage, with natural gas dropping near $6 per thousand cubic feet equivalent and oil sliding below $60 per barrel -- and thus might be had cheaply.

Exxon Mobil is the king of them all: It was sitting on $37 billion in cash at the end of the third quarter. But since the Mobil deal, it hasn't played the M&A game. CEO Rex Tillerson didn't give any clues on his third-quarter conference call Oct. 30, saying only that the company didn't expect to make any changes to its plan to spend $25 billion to $30 billion on capital and exploration expenditures over the next five years.

ConocoPhillips has been vocal about sitting on the sidelines. Last spring at the company's annual meeting, CEO Jim Mulva said he had plenty to develop without acquisitions -- and quashed a rumor that the company was interested in buying EnCana Corp.'s Canadian oil sands unit once it was spun off (since canceled due to the markets). He reiterated his views Oct. 22, when the company announced third-quarter earnings, saying the company would watch costs and prioritize spending. "Until we are more certain of probability, I think our concentration is to live within our means," he says.

Chevron Corp., meanwhile, is also holding on to its cash. In late October CEO Dave O'Reilly said that "disciplined capital spending and tight control over costs remain extremely important" but that it would continue to invest in attractive projects.

Pritchard Capital Partners LLC senior analyst Ray Deacon thinks bottom fishers like Philip Anschutz could come back into the market again, noting his involvement with Carrizo Oil & Gas Inc.'s drilling program in upstate New York. "He came in when Forest was on the ropes," Deacon says. "He's done it before."

Kirk Kerkorian has already jumped in. On Oct. 31, Tracinda Corp. announced plans to make a cash tender offer for up to 14 million shares of Denver oil and gas explorer Delta Petroleum for $11 per share, or $154 million, a 20.7% premium. Added to Tracinda's current position of 35%, the purchase would make it a 48.5% owner.

Mexican billionaire Carlos Slim Helú has also joined the fray. According to a filing with the Securities and Exchange Commission last month, Slim paid $15 million for 2.2 million shares of Edmond, Okla., onshore driller Bronco Drilling Co. -- good for a 7.65% stake.

Bronco has a contract to drill three wells for Mexico state-owned oil monopoly Petróleos Mexicanos, known as Pemex. But it was also the target of a failed $430 million takeover by Allis-Chalmers Energy Inc., which walked away from the deal after Bronco's shareholders expressed unhappiness with the price. Slim is a significant Allis-Chalmers shareholder and debtholder as well.

Other foreign players besides BP and Shell could come rushing in. StatoilHydro CEO Helge Lund said in early November that he expected the oil industry to endure several years of turbulence that could lead to a new wave of consolidation. "There will be more uncertainty, and many small and medium-sized players will see more challenges," he said. "I would not be surprised if M&A activity picks up."

The next tier of companies -- those known as superindependents -- are probably looking at acquisitions as well, including Devon Energy, Occidental Petroleum Corp. and Apache Corp. These independent exploration and production companies are probably sitting on a further $10 billion in cash.

Tudor Pickering Holt sees more independents merging with independents, which have more desire for consolidation, given their understanding and appreciation of the assets. But they also have less flexibility in offering all cash. "With the credit crunch ongoing, [it's] hard to see anything but a stock-for-stock public company deal among the independents," the firm wrote in a report. "Even the large cap independents that have tons of cash would likely want a healthy stock component."

The firm notes the seller might not want cash, citing the example of Petrohawk Energy Corp., which has lots of new promising prospects -- particularly in the Haynesville Shale of Louisiana and Texas -- but not a lot of cash. Buying the company at a 100% premium is still less than half of where it was trading just a few months ago. "A cash deal forfeits the upside," the firm says.

In October Occidental CFO Steve Chazen said that with financing an issue, any dealmaking in the industry over the next six months would most likely be for stock. But he didn't reveal what Occidental -- which had $1.5 billion in cash as of June 30 and will generate an additional $3.5 billion to $4 billion in free cash next year -- might be interested in.

In September Occidental did buy the rest of Plains Exploration & Production Co.'s interests in the Permian Basin of West Texas and New Mexico and the Piceance Basin of Colorado for $1.25 billion. And in October the company borrowed a further $1 billion, despite having a $1.7 billion untapped revolver.

The reason? Tudor Pickering analysts think they know why. "We've said cash is king, and we know asset values are falling," the firm wrote in a report Oct. 17. "[Occidental] paying $70 million per year seems like a reasonable expense for deal optionality."

Some of the independents are just looking to add to properties they already have. Devon CEO Richels said at the October symposium that the company would most likely continue to buy land in areas where it has a dominant position.

Deacon thinks Devon won't make any bold moves. "It's going to be hard for Devon to go out and acquire somebody," he said. "They already have strong projects in-house. Their returns are very good. The returns would have to be supercompetitive."

Analysts have long thought that Devon would be a perfect target for Exxon Mobil, which has coveted its rich natural gas acreage in Texas' Barnett Shale. With Devon's shares down significantly over their $121-per-share 52-week high, maybe now is a good time?

Anadarko Petroleum Corp., after buying Kerr-McGee Corp. and Western Gas Resources Inc. a few years ago for $21 billion, also has enough to keep itself busy. "We might do a smaller acquisition, but we're focused on organic growth," CEO Jim Hackett said on the sidelines of an M&A conference in October.

Apache has taken a bolder stance, saying on a conference call Oct. 22 that its $2 billion cash position and strong credit rating leave it well positioned to "take advantage of some of the carnage," as CFO Roger Plank put it. But CEO Steven Farris was more cautious: "I don't see anything out there that would lead you to believe that things are going to get better before they get worse."

David Heikkinen, an analyst at Tudor Pickering Holt, agrees. "Clearly, the [acquisition and divestiture] market is a buyer's market, and deals are going to get cheaper, much cheaper," he says.

When they do, Deacon thinks Apache, which in the past has bought packages from the majors, might go after some shale properties smaller companies are developing. "They missed out on some of the resource plays," he said.

Such a move, however, would require a change in culture for Apache, which has typically bought asset packages the majors didn't want and squeezed more out of them, says one source.

There was speculation last year that Apache would buy Ultra Petroleum Corp. for its properties in Wyoming's Green River Basin, but nothing ever happened. Ultra Petroleum's stock is half of what it was last summer. "With energy prices down significantly since July, property acquisitions, perhaps in some new emerging resource plays, might be in the works," Gimme Credit LLC analyst Phillip Adams wrote in a report about Apache in September.

But in the end, some analysts think oil and gas prices will need to start heading upward again for deals to happen. "M&A only happens when the forward commodity market is an upward sloping place," Deacon says. "Buyers feel better when prices are moving up, not down."