ACQUISITION ACTIVITY IN THE U.S. oil industry appears poised to set records this year, based on early third quarter statistics.
A summary of upstream acquisition and divestiture (A&D) activity by Randall & Dewey Inc., Houston, reveals that, following second quarter activity that was slower than in 1997, recently announced deals such as the enormous BP-Amoco alliance virtually assure that 1998 will set a record for transaction volume, "perhaps a headline-grabbing double the $23 billion recorded for 1997," said the firm.
But low oil prices are reducing the average value of the reserves being acquired. According to a report by Cornerstone Ventures LP, Houston, despite fast-paced transaction activity during the second quarter, a softening of reserve values indicates a market in transition. Continued low oil prices mean the high level of merger and acquisition activity in the upstream sector will continue.
Acquisition activity
U.S. A&D activity in the first half totaled $4.2 billion vs. $7.4 billion in first half 1997, according to Randall & Dewey.In 155 transactions worth a total $3.1 billion, reported reserves of 469.4 million boe yielded an average acquisition cost of $5.44/boe. This is a decline of 25¢/boe from the first quarter's average acquisition cost of $5.69/boe.
In the second quarter, five transactions exceeded $100 million in value each, bringing the total for the first half up to 13, said Randall & Dewey.
Included in the second quarter's deals were two mergers: Lomak Petroleum Inc. and Domain Energy Corp., valued at $295 million; and Pogo Producing Co. and Arch Petroleum Inc., valued at $93.1 million. Other large transactions included Petro-Hunt Corp.'s $194 million acquisition of Occidental Petroleum Corp. properties, Seneca Resources Corp.'s $146 million acquisition of California properties, and First Energy Corp.'s acquisition of Marbel Energy in the Appalachian area.
While first half reserves values for all deals averaged $5.44/boe, the larger transactions (greater than $100 million) had an average reserves value of $6.19/boe, while the smaller ones averaged only $4.53/boe.
First half acquisitions were dominated by independents, which accounted for 76% of the buying activity, on the basis of deal value. Integrated companies accounted for only 11% of the activity.
Independent firms accounted for 48% of the assets sold vs. 20% for integrated oil companies.
Reserves transactions
According to Cornerstone's data, U.S. oil and gas reserve values declined slightly in the second quarter, to a median value of $5.08/boe vs. the first quarter revised value of $5.20/boe-a decrease of 2.4%.The second quarter median reserves value was derived from 39 deals for which transaction values and reserve quantities were disclosed.
Transaction activity during the second quarter was fast-paced, said Cornerstone, with 75 deals closing-a 63% increase from the revised number of deals (46) that closed in the first quarter. The flurry of deal-making activity, along with a softening of reserve values in the second quarter, were telltale signs that the market is in transition from a seller's market to a buyer's market, said the analyst.
The total value of the second quarter deals was $5.467 billion, a 48.4% decrease from the first quarter's revised figure of $10.595 billion but more than triple the $1.355 billion worth of transactions that closed in second quarter 1997.
As usual, the majority of the deals were concentrated at the smaller size level, with 33 of the 55 for which dollar values were reported falling below $25 million, said Cornerstone. But these smaller deals accounted for only 3.1% of the aggregate deal value.
Nine transactions valued at $25-50 million were reported, and four were for $50-100 million.
Nine large transactions (more than $100 million) were reported, totaling $4.531 billion (83% of the total). These large deals were highly gas-dominated and commanded $1.12/Mcfe, on average, reflecting a significant premium over the smaller deals.
"A two-tier market is clearly differentiated based on deal size," said Cornerstone.
The analyst said sellers received a median price of $0.916/Mcfe for gas-dominated deals in the second quarter, down from the first quarter's revised median of $0.942/Mcfe but consistent with second quarter 1997's median value of 0.910/Mcfe.
The second quarter saw the median price paid in oil-dominated deals fall to $3.86/boe from the first quarter's $4.08/boe, a more than 25% discount from the $5.18/boe sellers were fetching in the second quarter of 1997, said Cornerstone.
Outlook
"Last year's high transaction volume reflected a near-perfect market for acquisitions and divestments," said Randall & Dewey, "fueled in large part by friendly capital markets, stronger gas and oil prices, and strengthened financial statements. So what could go wrong with such a favorable (U.S.) environment?"Theellipseanswer from the marketplace may have significant longer-term implications as our industry copes with abrupt change one more time. The downdraft in oil prices and the weak demand for energy shares have caused industry leaders from large and small companies alike to seek nontraditional avenues for growth opportunities in the continuing quest for increased shareholder value.
"From another perspective," said Randall & Dewey, "the upward trend in (U.S.) finding and development costs, coupled with the deteriorating market performance for the mid-size and small (U.S.) E&P companies, underscores the fundamental changes under way in the industry: e.g., domestic consolidation and expansion to deepwater and international opportunities."
Randall & Dewey believes that more than 50 transactions with a total value of well over $5 billion can be considered pending.
"For the remainder of 1998, the list of significant opportunities is expected to grow, as the availability of capital and the direction ofellipseprices becomes increasingly questionable."
Cornerstone Managing Partner Hal Miller forecasts that, as oil prices remain in the $13-16/bbl range, "the high level of M&A activity in the upstream sector should continue unabated."
"E&P companies that are the most highly leveraged, or the higher-cost producers, as well as those that are most heavily weighted toward oil instead of natural gas, are among the most vulnerable to the stronger companies who view the low commodity prices as an opportunity to step up their acquisition efforts," said Miller.
He added that independents' finding and development costs have significantly increased, compared with the cost of growth through acquisitions. Therefore, said Miller, "the relative cost of growth through the drill bit vs. acquisitions may now be tilting even more favorably toward acquisitions during the near term."
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