Independent oil and gas company TXCO Resource Inc. (TXCO) said Thursday it begun a strategic alternatives review that includes a merger or sale - a sign that lower oil prices are forcing small firms to seek transactions.

The San Antonio, Texas, company - whose assets are concentrated in the Maverick Basin in southwest Texas - said no formal decision have been made and no agreement have been reached. It added that any development from the review will be disclosed after the board of directors approves a definitive transaction.

Analysts seen TXCO's move as an illustration of what the energy sector is likely to see in the next months, when small companies with valuable acreage but financial bottle necks will try to make deals with cash-rich major oil companies such us Exxon Mobil Corp, (XOM) or large independents like Apache Energy Corp. (APC).

"The energy sector is going through probably one of the most difficult downturns and going into 2009 we expect much more of these announcements to happen," said Irene Haas, analyst at Canaccord Adams.

Years of high commodity prices have left some oil companies overstretched with debt to finance ambitious growth plans and other flush with cash, creating a fertile field for a wave of mergers and acquisitions. Lately, opportunities have opened up, as the deepening financial crisis has exacerbated the drop in oil prices as well as financial woes of smaller companies. Oil futures on the New York Mercantile Exchange currently trade around $35 a barrel, more than 75% below the all-time high hit in July 2008.

Shares of TXCO were trading 28 cents up to $46.27 in mid-day trading.

TXCO's capital spending budget for 2008 was about $130 million, but this year the company is expected to spend only $50 million - a budget that has crippled its ability to develop its assets by its own.

"The company realizes that in order to take some of their projects from concept to reality is going to take a lot of capital," says Philip McPherson, senior analysts for the energy group of Global Hunter Securities, LLC. "A sell or a merger could bring a larger a player in the basin and allow them to realize the value of some of these assets."

Haas said that investors are likely to receive the announcement in a neutral way until some tangible transaction occurs. The company said there can be no assurance that any particular alternative will be pursue or that any transaction will occur.

"We remain in an early stage of development, considering the large acreage position we have for a firm our size and the potential of our multiple resource plays," said TXCO Chief Executive James E. Sigmon. "We are exploring all strategic alternatives to assure that we can maximize value for our shareholders as we adapt to the industry's current, unstable financial and commodity price environment."

TXCO said Goldman Sachs is its financial advisor.

-By Isabel Ordonez, Dow Jones Newswires; 713.547.9207; isabel.ordonez@dowjones.com

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