Reports make conflicting predictions for industry M&A activity

Two energy investment firms have drawn different conclusions from their analyses of first quarter merger and acquisition activity. While M&A activity is certain to continue in the energy sector, the pace of US transactions is expected to slow from the aggressive rates seen in the late 1990s, according to a report released by Cornerstone Ventures LP. But Randall & Dewey Inc. drew another conclusion in its report on global M&A transactions.


Two energy investment firms have drawn different conclusions from their analyses of first quarter merger and acquisition activity.

While M&A activity is certain to continue in the energy sector, the pace of US transactions is expected to slow from the aggressive rates seen in the late 1990s, according to a report released by Cornerstone Ventures LP, a Houston-based oil and gas investment banking firm. But Randall & Dewey Inc., also a Houston-based investment advisor for the energy industry, drew another conclusion in its report on global M&A transactions.

Despite industry observers' expectations of a slowing in the pace of M&A deals, says Randall & Dewey, continued stability in oil and gas prices, coupled with prospects for undervalued situations, will no doubt bring bargain-hunting capital back to the M&A market.

Both firms summarized first quarter 2000 M&A activity in the petroleum industry. Here are their conclusions.

Cornerstone
Cornerstone, in its report, says that the pace of US reserves transactions has been slowed by the falling value of oil and gas reserves in first quarter 2000. US reserves vales fell 11% to a median value of $4.29/boe from fourth quarter 1999's revised value of $4.81/boe.

Cornerstone also noted that US transaction activity for the first quarter was "nearly dormant," with only 33 deals closing, a drop of about 30% from fourth quarter's 47 closings and down just over 23% from first quarter 1999's total of 43 deals. The first quarter 2000 figure also was down 38% from the average number of deals that have closed the first quarter each year over the last 10 years.

Many buyers are still under the impression that sellers' expectations continue to be too high, Cornerstone says. But those buyers that were able to close deals during the first quarter, according to the median values reported, were able to negotiate favorable deals relative to the prices paid for reserves over the last few quarters.

Cornerstone also pointed out that the aggregate value for onshore US M&A activity in the first quarter was $1.856 billion, a 27% increase from fourth quarter's revised figure of $1.466 billion but nearly a 58% decrease from the $4.368 billion value recorded during the first quarter of 1999. Of the 27 transactions reporting dollar values for the first quarter, 14 were concentrated at the smaller size level (below $25 million), which accounted for 8% of the aggregate deal value.

The first quarter did see an increase in larger transactions, Cornerstone noted. These deals, however, didn't command the normal premium usually seen for larger transactions. This anomaly could be partially attributed to the fact that these deals involved either long-lived Appalachian or Permian basin properties, where median values are typically lower because reserves are generally long-lived and have higher operating costs than other regions.

Cornerstone reported that of the 27 transactions that disclosed deal value for first quarter 2000, 23 were property acquisitions totaling $1.727 billion. Only four mergers-corporate acquisitions were reported, with a combined value of just over $129 million.

Randall & Dewey
Randall & Dewey reports that worldwide industry transactions for first quarter 2000 totaled $19.9 billion in 75 deals.

Randall & Dewey bases its data on announced deals, rather than concluded ones. Included in the Randall & Dewey figures, for example, was Phillips Petroleum Co.'s acquisition of ARCO's Alaskan unit for $7 billion (completed in the second quarter) and Occidental Petroleum Corp.'s $3.6 billion announced acquisition of Altura Energy LP.

With 12 transactions greater than $100 million in size accounting for $19.2 billion, or 97% of announced first quarter volume, "The market continues to be driven by large stock transactions, while asset transactions account for a smaller part of market activity," Randall & Dewey says. And the second quarter was barely under way when Anadarko Petroleum Corp. announced its acquisition of Union Pacific Resources Group Inc. for $7.25 billion.

The renewed interest in M&A activity stems from exploration and production equities valued at "bargain basement" prices, despite longer-term futures prices being stronger at yearend 1999 than in the past 2 years, said Randall & Dewey.

The gap between fundamental asset values for E&P companies and share prices widened to historical proportions, creating buying opportunities. This caught the attention of investors and acquirers alike, significantly increasing the demand for E&P shares and companies, says the firm.

The prospect that the Organization of Petroleum Exporting Countries would bring much-needed stability to world oil prices, and that North American gas markets were due for some unseasonable "sticker shock" as demand outstripped the ability to deliver, helped create the right atmosphere for buying.

Takeover fever also has gripped the Canadian energy sector, where three unsolicited offers for Canadian firms emerged. Dallas-based Hunt Oil Co. was reportedly looking to buy Calgary's Ulster Petroleum Ltd., but on Monday, Hunt said it was buying Calgary-based Newport Petroleum Corp. for $760 million cash (Can.), including debt of $271 million. Meanwhile, a hostile bid emerged for Canada's Ranger Oil Ltd., which put itself up for sale earlier this year, and Calgary-based Bellator Exploration Inc. accepted an unsolicited offer from Baytex Energy Ltd.

In the US, many industry observers believe BP Amoco PLC may seek further acquisitions once it has integrated ARCO into its operations.

As for independent energy companies, Randall & Dewey says the "Darwinian nature" of the energy sector "will no doubt assure a steady flow of [properties] over the next several years." As larger companies grow through mergers and acquisitions, a wide range of property assets will likely be sold off to comply with merger regulatory approval, giving independents new E&P opportunities as these properties become available on the market.

The continued improvement and stability in oil and gas prices, coupled with prospects for undervalued situations, will no doubt bring bargain-hunting capital back to the M&A market in the continuing search for possible transactions, Randall & Dewey says.

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