HEROLD: LOW U.S. GAS PRICES SPAWN MERGERS, ACQUISITIONS

Low U.S. wellhead gas prices are helping trigger another round of corporate consolidations and takeovers. John S. Herold Inc.'s quarterly survey of oil and gas company mergers and acquisitions (M&As) shows reserve values in transactions since 1989 have been increasing. Meanwhile, implied reserve values on equity markets have dropped, especially since the first of 1991.

Sept. 9, 1991

4 min read

Low U.S. wellhead gas prices are helping trigger another round of corporate consolidations and takeovers.

John S. Herold Inc.'s quarterly survey of oil and gas company mergers and acquisitions (M&As) shows reserve values in transactions since 1989 have been increasing. Meanwhile, implied reserve values on equity markets have dropped, especially since the first of 1991.

The Greenwich, Conn., company's second quarter 1991 M&A survey found unit values of reserves involved in worldwide averaged $5.97/bbl of oil equivalent (BOE). Based on June 1991 oil and gas company stock prices, equity markets valued reserves in the ground at $3.65/BOE.

When the difference is so large between reserve values assigned by equity markets and transactions, Herold says, the stage is set for "another round of drilling on Wall Street" as financially sound companies, investor groups, or large individual investors begin looking for takeover candidates.

Based on its latest quarterly M&A survey, Herold Vice Pres. Bob Hinckley said, "We think another round of consolidation is already starting.

"In addition to normal acquisition activity, we're beginning to have a lot of takeovers, be they friendly or hostile."

OVERALL TRENDS

Herold counted fewer oil and gas M&As worldwide during second quarter 1991 than 1 year ago. But the volume and value of reserves involved and average unit value increased.

Three large transactions dominated second quarter M&A activity:

Occidental International Oil Inc.'s sale to Elf Enterprise of mainly oil reserves in the North Sea.
Amoco Corp.'s sale to Apache Corp. of U.S. onshore reserves.
Freeport-McMoRan Inc.'s sale of U.S. Gulf Coast and Mid-Continent reserves.

The mix of reserves in second quarter M&A transactions shifted toward oil mainly because of the Oxy-Elf deal.

Second quarter 1991's average unit value of $5.97/BOE was the highest in the past 3 years.

The company said pending M&As involve reserves valued at $1.9-2.2 billion.

SECOND QUARTER

Worldwide during second quarter 1991, 527 million BOE of reserves valued at $3.147 billion changed hands. For the first half of the year, 954 million BOE valued at $5.391 billion changed hands in 45 M&A transactions, an average unit price of $5.25.

Of regions surveyed, Herold reported U.S. M&As in second quarter 1991 led the way, with 23 of 30 deals worldwide. U.S. M&As involved 305 million BOE reserves valued at $1.609 billion, an average unit cost of $5.08.

During first half 1991, U.S. M&A activity totaled 29 deals in which companies paid $2.594 billion for 450 million BOE.

The mix of U.S. reserves acquired during second quarter 1991 through M&As was 59% gas, down from 85% in first quarter 1991. Herold said the first quarter's anomalous gas influence in the U.S. likely was based on perceptions that gas prices were ready to rebound.

First half 1991 M&A activity also was up in the North Sea, compared with first half 1990. During the first 6 months of 1991, 361 million BOE of North Sea reserves valued at $2.308 billion changed hands in seven deals. Six month totals in 1990 were 132 million BOE valued at $663 million in five transactions.

Canada recorded nine M&A transactions in first half 1991, two more than in first half 1990. However, 143 million BOE this year brought $559 million, compared with $673 million for 147 BOE in first half 1990.

LIKELY TRANSACTIONS

Among large M&As Herold considers to be likely offerings are:

BP America Inc. plans to sell onshore U.S. oil and gas reserves of subsidiary Tex/Con Oil & Gas Co. with a value of $500 million.
A Shell Oil Co. package Gulf of Mexico and U.S. Gulf Coast reserves valued at $300 million.
Williams Cos. properties in the U.S. San Juan basin, which should bring $200-300 million.
A $400 million package of oil and gas reserves in the North Sea by Norske Hydro AS and an undisclosed Swedish company.

The largest international deal rumored to be in the offing is a plan by Algeria to sell interests in state owned reserves valued at up to $6 billion. But Herold says that deal is extremely speculative because only four or five companies in the world are large enough to consider it.