By Paula Dittrick
Senior Staff Writer
HOUSTON, Mar. 31 -- Reserves values in US and Canadian oil and gas transactions continue to grow, with the weighted average implied value reaching $18/boe during the first quarter of 2006, said John S. Herold Inc. and Harrison Lovegrove & Co. Ltd. in a report on mergers and acquisitions (M&A).
Worldwide transaction values for upstream corporate and asset deals totaled more than $160 billion last year, compared with over $68 billion during 2004. Expenditures on corporate acquisitions alone during 2005 amounted to $120 billion, the consultants said in a preview of their 2006 Global Upstream M&A Review. The report is expected to be released during April.
Among the deals announced last year, ConocoPhillips offered $35.6 billion for independent Burlington Resources Inc. (OGJ, Dec. 19, 2005, p. 41.) Chevron Corp. acquired Unocal Corp. in a cash-stock transaction for $19 billion (OGJ, Aug. 22, 2005, p. 32).
Michael Bridden, managing director of research for Harrison Lovegrove's London office, noted the top 10 deals during 2005 represented over half of the deal transaction value worldwide in 2005. Nine of the 10 transactions involved corporate deals.
"Companies have been reticent to sell assets because they are getting good cash flow from them. What we are seeing is that when asset packages are rare, then companies tend to buy companies," Bridden told a Mar. 29 news conference in Houston.
Christopher Sheehan, John S. Herold director of M&A research, said assets sales of $12-13 billion have been booked in the US and Canada already this year.
"We are seeing a very competitive and high-priced market in North America," Sheehan said. "Canadian and European deal values are the highest, with the US not far behind in the pricing environment."
Reserves values
Global proved reserves costs jumped to $9.60/boe during 2005 from $3.16/boe in 2004. Proved reserve values soared to $8.10/boe outside the US and Canada and escalated to a record $14.62/boe in the US and Canada last year.
Pricing for oil and gas reserves was relatively flat during 2001-03 but has strengthened since then, the report showed.
Bridden said, "Buyers appeared to loosen their valuation criteria and regional focus due to competitive pressures and, primarily, strong commodity prices. The historical lag of implied costs to commodity prices has disappeared as even proved plus probable [reserves] values skyrocketed."
Canada was the most expensive M&A region during 2005, with 30% of deals involving proved reserves valued at over $30/boe. Sheehan noted the Canadian deal values for proved plus probable reserves were 20% higher than the value of US proved reserves.
"Royalty trusts are the most active in Canada in raising the acquisition ante," Sheehan said. "They have a dividend-based business model. They are looking at shorter-life property throwing off large cash flows. Royalty trusts have to replace those reserves, but they don't do a lot of exploration or development. So they are constantly having to go to the M&A markets to replace those reserves."
International oil companies showed keen interest in the US Gulf of Mexico and Canadian oil sands last year but were less willing to invest in Africa, South America, and Asia. Bridden blamed this trend on political risk, lack of infrastructure, and market access issues.
Coalbed methane transactions expanded outside of the US, while M&A investment in tight gas plays such as the Barnett shale in North Texas continued to rise, the report said.
National companies
National oil companies (NOCs) remain important buyers of upstream assets internationally. NOC transactions in the several years preceding 2005 had total worths of about $5 billion/year.
"Last year, we saw that number double to $10 billion," Bridden said. "Particularly, the Chinese have gone from $1 billion of acquisitions in 2004 to over $6 billion last year. Already within the first quarter this year, we have seen around $2.5 billion by Chinese companies in the international arena. Typically, these are in places where the international oil companies have either exited or found that the political risk is maybe a little difficult for them."
Consolidation of former Soviet Union firms with one another also boosted overall NOC spending, he noted.
"A lot of that has to do with investments predominantly by the state-owned company, or indeed by the state in Russia, consolidating their interests internally," Bridden said. "That influences the total dollar volume, but it's not conventional M&A in the way that you might expect to see it in companies in the West."
Contact Paula Dittrick at [email protected].
