HOUSTON (Dow Jones)--Devon Energy Corp.'s (DVN) chief executive said Wednesday he expects a wave of merger and acquisitions to happen in the next two years among independent natural gas producers as companies face persistent lower commodity prices, rising costs and lack of investment.

"I can see a period of significant consolidation in a couple of years," said John Richels, who was speaking at the NAPE Expo conference in Houston.

Consolidation should have already happened, but natural gas companies have been able to keep drilling intensively even at low commodity prices thanks to an infusion of about $44 billion from Wall Street, Richels said. But the flow of money is expected to sharply decrease soon, forcing financially-stressed companies to sell. Richels said Devon won't be an active player in the expected wave of mergers and acquisitions.

Consolidation along with the expiration of hedges that were set at much higher prices in 2008 would help natural gas prices to recover starting next year, Richels said.

"We believe that as we go into 2011 we will see a reduction of activity in the natural gas side that could drive prices up."

Much of the current drilling for natural gas in the U.S. isn't profitable at current prices, he added.

The head of Devon said that drilling costs for the natural gas and oil industry onshore the U.S. has significantly increased and that the trend is expected to continue. The cost of pressure pumping, a key service used in exploiting deeply buried shale-rock formations, increased 13% in the first half of the year and it's expected to increase 5% in the second half. Shale gas currently represents 15% to 16% of the total U.S. natural gas production, he said.

If Congress accepts the recommendation of President Barack Obama to repeal tax credits for the oil industry next year, such as the intangible drilling credits, Devon's cash flow could be cut by $850 million, Richels said. That will impact the company's capital expenditure budget for 2011, which is expected to be about $5 billion, he said.

There hasn't been a significant shift to onshore U.S. from companies that had operations in the Gulf of Mexico after the Deepwater Horizon oil spill, Richels said. Companies don't make that type of major decision in such a short period of time, he added.



-By Isabel Ordonez, Dow Jones Newswires; 713-547-9207; isabel.ordonez@dowjones.com