US reserve values edge higher despite fewer deals

March 5, 2001
The value of reserves in US oil and gas asset transactions increased in the fourth quarter of 2000, in spite of a lag in the number of deals completed.

The value of reserves in US oil and gas asset transactions increased in the fourth quarter of 2000, in spite of a lag in the number of deals completed.

The weighted average oil and gas reserve value for all US transactions that were closed during the fourth quarter last year rose to $5.53/boe, compared with a revised value of $5.32/boe reached during the third quarter.

Meanwhile, the median value of these deals dropped slightly from the third quarter's revised value of $5.20/boe to $5.10/boe in the fourth quarter.

This is according to investment firm Cornerstone Ventures LP, Houston, in a recently released quarterly reserve report.

"Overall, reserve values have reached levels that haven't been seen since 1997," Cornerstone noted. Values for the fourth quarter were derived from 19 deals closed during the quarter where transaction values and reserve quantities were both disclosed, Cornerstone said.

Deal activity to rise

Cornerstone said it expects a "significant" rise in deal activity during 2001. This increase, however, will not be accompanied by a decline in reserve values, the firm added.

The aggregate value of US onshore merger and acquisition (M&A) activity declined to $2.06 billion in the fourth quarter, vs. the $19.03 billion reached during third quarter 2000, Cornerstone said. Roughly half of this aggregate amount-more than $1 billion-was the total of 18 transactions where assets or properties were sold. The other $1.05 billion represented 3 deals where whole companies were either purchased or merged.

The $2.06 billion aggregate deal value consisted of 48% cash, 40% stock, and 12% debt. This compares with the third quarter's revised split of 2% cash, 60% stock, and 38% debt.

"Transaction activity during the fourth quarter followed the same slow pattern as the third quarter, with only 28 onshore deals closed," the firm said. This compared with the third quarter's revised figure of 34 deals. "This level of activity was also down 40% from fourth quarter 1999's total of 47 deals," Cornerstone noted.

"Of the 22 onshore transactions reporting dollar values for the fourth quarter, 9 were concentrated at the smaller size level, falling below $25 million. Five transactions were reported [at] $25-50 million, as well as five in the $50-100 million range. Only 3 transactions closed in the $100 million-or-above range, for a total value of $1.5 billion," said Cornerstone.

"[Reserve] values continue to strengthen, although activity has been less than robust," Cornerstone said. "Commodity companies typically tend to avoid acquisitions during periods of high commodity prices. This market environment is different, however, and [we forecast] an increase both in reserve values and in transaction activity."

Noteworthy deals

Several deals completed in the fourth quarter were highlighted in Cornerstone's analysis.

One such deal, which closed on Dec. 7, was the merger of Forest Oil Corp., Denver, and Forcenergy Inc., Miami. The deal created one of the 10 largest independent exploration and production companies in the US. Forest paid a total of $916 million for Forcenergy and acquired reserves totaling 65 million bbl of oil and more than 300 bcf of natural gas.

Separately, Montana Power Co., Butte, Mont., completed the $475 million sale of its nonregulated oil and gas business unit to PanCanadian Petroleum Ltd. in October. The Calgary-based firm acquired 79 million boe in total reserves, 55% of which was gas.

Also, Phillips Petroleum Co. acquired from an undisclosed seller coalbed methane reserves-primarily in the Powder River basin-for $123 million and a 90% average working interest. The deal included total reserves of 215 bcf.

Gas vs. oil

Gas-dominated deals-those transactions that entailed reserves of more than 50% gas, in oil-equivalent terms-made up 68% of the disclosed fourth quarter transactions, Cornerstone said. This was down from the revised 80% of gas-dominated transactions disclosed during the quarter before.

"In terms of actual reserves, gas accounted for 63.2% of boe traded, down from the third quarter's revised 65.4%," the firm said. "The median price paid for gas-dominated deals for the fourth quarter was 91¢/Mcfe, up slightly from third quarter's revised median of 87¢/Mcfe.

"The weighted average value for gas-dominated deals in the fourth quarter was about 93¢/Mcfe, similar to 95¢/Mcfe for the revised third quarter, a slight 2% increase."

The median value for oil-dominated transactions, meanwhile, increased during the fourth quarter. The median value reached $4.58/boe, up from third quarter's revised median value of $3.78/boe. The weighted average value for oil-dominated deals rose to $4.33/boe, vs. $3.32/boe for the third quarter.