Oil stocks have been in the news on the Australian market lately, with some major jockeying on the M&A (mergers and acquisitions) front.

First, there was the $11.7 billion scrip bid made by the big kahuna, Woodside Petroleum, to take over PNG-based Oil Search. Oil Search knocked Woodside back, and the Woodside share price has lost 12% while the company mulls a revised offer. Oil Search, in contrast, has gone the other way, rising 15%.

Then there was the $7.1 billion takeover approach made to Santos last month by the Middle East-backed Scepter Partners, with former chief executive John Ellice-Flint tilting for his old job. The approach came at $6.88 a share, but Santos rejected the bid: subsequently, the big South Australian has announced a $3.5 billion debt-slashing program and a $2.5 billion capital raising, and the share price has fallen below $4.

While the takeover bids swirl at the big end of the market, the mid-cap area of the oil and gas market has seen share price slumps, based on a tanking oil price.

Crude oil has lost almost two-thirds since June 2014, on the back of an estimated over-supply of 0.7 million to 2.5 million barrels a day, and prices are near six-year lows. The International Energy Agency (IEA) appears to have no good news for the oil market, saying that global stocks of crude oil are at record highs and that global oil demand will ease next year on the weaker outlook for the world economy and over-supply. The IEA forecasts global demand to slow to 1.2 million barrels a day in 2016, after surging to 1.8 million barrels a day this year.

So, is there any light at the end of the tunnel?

Peter Strachan from Stock Analysis is one analyst that thinks so. Strachan says the rising production picture over the last decade has been almost entirely a US shale oil (light tight oil, or LTO) story – despite a rising oil price, he says, production outside the US has been flat since 2004. A 4 million-barrel rise in output of LTO from the USA since 2011 has masked peak oil output from conventional reservoirs, he says. Even though the US shale producers have lifted their productivity as much as they can, the “US shale oil party is over,” says Strachan.

He sees US oil production falling by 100,000–120,000 barrels of oil a day, per month, right through 2016. That would see oil production falling from a peak of about 9.6 million barrels a day in April 2015, back to about 8 million barrels a day by the end of 2016. Even with an estimated 500,000 barrels of Iranian oil a day coming back into the market, following the nuclear deal struck with the country, the oil market will be under pressure, says Strachan. And that means rising prices. By the middle of 2016, says Strachan, oil prices could be back in the region of $US80–$85 a barrel.

It is a contrarian view, but if it is borne out, some of the mid-cap Australian oil and gas stocks represent a “once-in-a-generation opportunity,” he says.

Here is a glimpse of seven of the most potentially attractive opportunities. (Analysts’ consensus estimates were collated by FN Arena.)

Beach Energy (BPT): 59 cents

Market capitalisation: $769 million
Last 12 months: –45.2%
Analysts’ consensus price target: 83 cents
Implied upside: 40.6%

Drillsearch (DLSP): 70.5 cents

Market capitalisation: $333 million
Last 12 months: –36.3%
Analysts’ consensus price target: 85 cents
Implied upside: 20.5%

Cooper Basin oil and gas companies Beach Energy and Drillsearch Energy are merging in a $1.17 billion deal, to create a company with $20 million a year fewer costs and a strong balance sheet that can make more acquisitions in today’s depressed oil market. The companies say the merger will give the duo “enhanced scale” with a combined fiscal 2015 production of 12.1 million barrels of oil equivalent, plus an expanded portfolio of oil, gas and infrastructure assets. The Kerry Stokes-led Seven West group will hold a 20% stake in the merged group. Strachan says Beach is the best entry to the new group.

AWE Limited (AWE): 59 cents

Market capitalisation: $321 million
Last 12 months: –61.8%
Analysts’ consensus price target: $1.13
Implied upside: 91.5%

AWE produces gas from the Casino project offshore of the Otway Basin in South Australia, and the onshore Perth Basin. Last year AWE found the Waitsia field, which is potentially the largest conventional onshore gas discovery in WA since the 1960s. Encouraging results from initial testing at the Waitsia-1 well have AWE on track to commence producing in the WA domestic market in the first half of 2016. Its 35% owned BassGas project off South Australia has reached final investment decision (FID) approval. Strachan believes AWE is worth more than $2 a share.

Senex Energy (SXY): 16.2 cents

Market capitalisation: $190 million
Last 12 months: –62.1%
Analysts’ consensus price target: 29 cents
Implied upside: 79%

In September, Senex struck a significant gas sales deal with Santos’ $US18.5 billion GLNG venture in Queensland that opens the way for development of its Western Surat gas project and also gives it $42 million in cash and a gas-rich exploration permit that sits in the middle of the GLNG venture’s Roma coal seam gas acreage. Senex will supply 50 terajoules a day of gas to GLNG over 20 years from the Western Surat project, which is expected to cost several hundred millions of dollars to develop and is targeted for a final investment decision in 2017. Senex has no debt, about $45 million of net cash on the balance sheet and a tangible revenue stream opening up in the near future.

Karoon Gas Australia (KAR): $1.72

Market capitalisation: $429 million
Last 12 months: –37.6%
Analysts’ consensus price target: $2.86
Implied upside: 66.3%

After selling its Browse Basin permits to Origin Energy last year, reducing considerable pressure from its balance sheet, Karoon is focused on its Brazilian oil discoveries, Echidna and Kangaroo, particularly the Echidna field. Karoon holds 65% of its Brazilian fields and is likely to farm-out interests (bring in other investors) to reduce costs. In the meantime, Karoon holds $247 million of cash: Strachan reckons its cash asset backing at $3.20 a share.

Horizon Oil (HZN): 10.5 cents

Market capitalisation: $137 million
Last 12 months: –63.8%
Analysts’ consensus price target: 14 cents
Implied upside: 33%

Horizon focuses on three main areas, its producing Maari field (offshore New Zealand), its interests in the Beibu Gulf (offshore China) and assets it’s developing in Papua New Guinea. The company currently produces about 4,200 barrels of oil a day net from Maari and Beibu Gulf, which generated more than US$80 million in net operating income in FY15. Gas constitutes about two-thirds of the PNG reserves and Horizon’s medium-term strategy is to focus on Asian gas for growth. Horizon is another “extremely cheap stock,” says Strachan.

FAR Limited (FAR): 8 cents

Market capitalisation: $280 million
Last 12 months: –38.2%
Analysts’ consensus price target: 11 cents
Implied upside: 37.5%

Last month, FAR announced two world-class oil discoveries off the coast of the west African nation of Senegal that could be transformational for the company. FAR started drilling three appraisal wells earlier this month, in a program that is estimated to be completed in mid-2016. FAR is not actually spending anything, because all the costs of the wells are being paid by global petroleum giants ConocoPhillips and Cairn Energy. So FAR can sit on its $30 million in the bank. FAR also holds exploration acreage in Guinea Bissau, to the south of Senegal, and on the other side of the continent, in Kenya.

All charts sourced at Yahoo!7 Finance, 16 November 2015

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