With some smaller energy companies hitting the auction block and larger strategics poised to buy, consolidation seems likely in the midmarket energy industry.

On the one side are energy firms seeking cash or looking to restructure debt. In the past month, three companies have put themselves on the block: Bayou Bend Petroleum Ltd., a Vancouver, British Columbia, oil and gas explorer with operations in the Gulf of Mexico, announced that it had hired Canaccord Adams Inc. to explore alternatives; natural gas producer Williams Cos. of Tulsa, Okla., said it was seeking a potential sale; and Atlas Pipeline Partners LP, a natural gas provider based in Moon Township, Pa., said it tapped UBS Investment Bank to examine divestitures to lessen debt and enhance liquidity.

Meanwhile, major oil companies are pulling back on drilling as oil prices tumble, lowering capital expenditures and leaving them sitting on cash. They aren't alone. Equipment companies are also on the prowl for add-ons. Smith Materials and Equipment Co., Halliburton Co. and Cameron International Corp. are hunting for targets, according to Mike Parham, a banker at McGladrey Capital Markets LLC.

"Buyers are also seeking greater economies of scale, add-on products and services, including oil well tools and rentals, which have been in short supply," says a middle-market energy report from Citi Capital Strategies. The report notes in particular that equipment companies have been using M&A to obtain new technology.

Cameron added two equipment companies this year. On Sept. 23, it bought oil rig equipment manufacturer KB Industries of Odessa, Texas, for $85 million. On Feb. 19, it acquired lifting systems manufacturer SBS Oilfield Equipment GmbH of Murzzuschlag, Austria, for undisclosed terms.

A Halliburton spokeswoman said in an e-mail that the company continues to invest in new technologies and in M&A.

It's often not so cut-and-dried. Not all majors that have cut back on drilling are looking to buy. Many find themselves in the same predicament as some middle-market companies. Chesapeake Energy Corp., for example has become a seller, largely as a result of a falling stock price, Parham says. The Oklahoma City company was recently trading under $15, a decline of nearly 80% from its June 2 high of $69.40.

With credit markets tight, Chesapeake has been selling properties to fund development of other prospects. On Oct. 20, it sold 38,000 acres in the Woodford Shale region of Oklahoma's Anadarko Basin to Denver oil and gas explorer Cimarex Energy Co. for $180 million in cash.

Parham also anticipates private equity will return to oil-and-gas midmarket M&A. "I think [in] January or February you're going to see a lot of private equity funds jump back into the market," he says. "There's going to be a lot of going-private deals."

Already buyout shops are starting to do deals, albeit not of the take-private variety. Quantum Energy Partners, Warburg Pincus and Avista Capital Partners all announced financing transactions in November. "Attracted by strong cash flows and reasonable multiples, private equity groups have moved past their concerns about commodity price volatility and operating costs to become operating players in the space," says a McGladrey report on energy services published at the end of the third quarter.

Energy-focused private equity firms are springing up, including Natural Gas Partners, Lime Rock Partners and Quantum Energy. Investors have committed sizable pools of capital to these deals. Energy PE, after raising $17.9 billion in 2007, pulled in $10.2 billion in the first half of 2008, says the report.

Quantum Energy announced Nov. 12 that it is part of a consortium investing $140 million in equity to form Houston oil-and-gas explorer Denali Oil & Gas Partners III LLC that will explore and buy land in south Texas.

Warburg Pincus, as of Nov. 10, has invested a total of $600 million in Laredo Petroleum LLC to help it buy and develop property in the midcontinental U.S. Warburg formed the Tulsa, Okla., exploration and development company in 2007 with an initial $300 million investment.

"We weren't through growing the company. We thought it was a good idea to go back and double up," says Laredo CFO Mark Womble.

Womble says the money will be used to buy and develop new properties, mostly in the Texas Panhandle and Oklahoma's Anadarko Basin. "We'll either use it to drill more reserves, or we'll use it to buy existing reserves with upside potential."

Womble says Laredo has put out new acquisition offers in recent days and continually evaluates new opportunities.

The oil price decline has led many companies to change focus, he adds. "We're getting a lot of inquiries from people on opportunities that a few months ago weren't available," he says. "I think a lot of it is people are having to rationalize their drilling plans and really prioritize what they want to get done."

A new president heightens anxieties. "There's a concern you're going to see an increase in the capital gains tax [under an Obama presidency]," says Miroslav Lazarov, vice president at McGladrey. Lazarov adds that while an Obama administration would be more focused on developing renewable energy, any economic upswing would boost oil demand, which should keep markets robust. "We're going to be forced to start drilling again," Lazarov says.

Mother Nature may also complicate matters. "All it's going to take is a little bit of a cold spell, and oil prices are going to shoot back up," says Parham, who anticipates a return to oil prices of $80 a barrel. "Don't believe the demand-decline hype."