Authors Heather and Wiggins argue (OGJ, Oct. 29, 2001, p. 42) that discount rates are lower and valuations higher for larger (and in their argument, better) producing properties. They attribute this lowered discount (reduced risk) rate to improved technology and/or the buyer's lower operating cost. They contend a well-conceived purchase enhances the synergy between the buyer and the properties bought that might not be evident for 5 or more years.
But there is an uglier reason some properties have been purchased at a much lower discount rate. Some large independent companies, who fear being bought out, are willing to pay more for a property in order to stave off being gobbled up themselves. Taking on a debt load with a much slower payout makes them less appetizing. I am confident that this was the main motivation in at least one of the largest independent mergers of the past year. They saved the company, and their own jobs, by deliberately paying too much for proven reserves.
Is the only reward for being good geologists and good engineers to be downsized by a corporate raider? Between Shell and ExxonMobil it is reported that $20 billion is floating around looking for independent producers to swallow up. The majors spent the past 20 years selling off US assets and now they are desperate to buy their way back in. As Jack Stevenson noted in "A & D Watch" (September 2001)ellipse"the majors laid off all their extra G & G personnel to prove to analysts that they were good managers instead of putting them on developing prospects for the future."
In the definition of "market value," there is a caveat that the transaction should be at arm's length. Was the motivation to purchase reserves at market value, or was it to increase debt load and avoid hostile takeover? The valuations of the smaller properties are less affected by this phenomena solely because they are too small to be of interest to the majors who are buying rather then exploring for their reserves.
Terrel Shields
Shields Valuation Surveyors
Siloam Springs, Ark.