MARKET FOR OIL AND GAS ASSETS DEFINED IN SURVEY

Lynn Taggart
Energy Sale Services Inc.
Oklahoma City

Donald A. Murry, PhD
University of Oklahoma
Norman, Okla.

Hundreds of companies are currently active in the oil and gas acquisition and disposition marketplace, but unfortunately the entire sale process within the industry continues to operate inefficiently.

The mechanism for selling oil and gas properties in this "secondary market"-as used here, a term that excludes initial investments in oil and gas assets and sales of drilling program shares-is sort of catch-as-catch-can. Identifying who is seeking what type of property at any time is difficult, bordering on guesswork.

Despite the problems, there are several methods used by today's buyers and sellers to bring about a transaction. These include:

• Auctions-usually held for the purpose of disposing of marginal or lower-valued oil and gas assets.

• Sealed bids-circulated announcements of properties that are offered with data packages and that solicit sealed bid offers.

• Negotiated sales-with data packages which are circulated on a limited basis, leading to direct negotiations between interested buyers and sellers.

At times, it is difficult to distinguish between the latter two methods because often the sealed bid is only the first round of negotiation between a buyer and a seller.

The market, therefore, is very loosely defined. With the exception of the auction, where there is a central, physical location for a buy-sell transaction, most buyers and sellers must seek ways to locate one another.

Auctions have special limitations since buyers usually must be present to submit bids, and sellers run the risk that worthy bidders will not be present to bid on higher valued or special properties. Consequently the properties put to auction are usually lower-valued properties.

A FORMIDABLE TASK

In the other transaction types, the responsibility of bringing buyer and seller together most often falls to the seller. However, in an unstructured market, this can prove to be a formidable task.

The potential buyers of any single property are hard to identify, and their requirements change as circumstances change. Rarely do buyers openly announce their interests.

Moreover, state securities laws may inhibit announcements and communications and limit participants in the market for producing properties. Potentially, the sale of producing oil and gas properties, even in this secondary market, may be defined as the sale of a security, which in turn sharply limits the method of advertising properties for sale and the parties to whom properties may be advertised. It is quite likely that interested parties must be "qualified" to be eligible to purchase a producing party.

Given the market's deficiencies, the chances of attracting 100% of the potential buyers for a property or group of properties are slim, regardless of whether the auction, sealed bid, or negotiated sale method is used.

Since the market is so loosely defined, it is not surprising that little information exists on transactions, let alone participants and their interests; however, a recent survey of 186 company representatives and individuals, who declared themselves as "in the market," disclosed some of this information at a point in time.

Respondents described their interest and their activity during the late spring and early summer months of 1991. Energy Sale Services Inc. identified the 186 potential, active buyers of oil and gas properties from a database of 9,600 known oil and gas market participants. The respondents were declared potential buyers, who then characterized their acquisition preferences in the survey.

The study revealed a number of unanticipated results, which is not surprising given the poor structure of the market and the lack of information that exists about potential buyer preferences.

For example, the respondents showed no preference between oil and gas properties; in general, they indicated that they were equally interested in both. However, survey participants did indicate they had an overwhelming preference to buy through negotiated sale.

The size of the properties being sought was also surprising; nearly two thirds of this group were seeking properties with a minimum purchase price of $1 million.

THE RESPONDENTS

Although the respondent group represented companies and individuals in 22 states and Canada, the majority came from Texas and Oklahoma. That undoubtedly influenced the types of properties that the group as a whole was seeking and the location of desired properties.

The survey group comprised individuals, small and large independents, and major oil companies. Thirteen percent of the companies in the 1990 Oil & Gas Journal 400 were represented.

The respondents, as a group, have been active recently as both buyers and sellers. Of those answering the appropriate questions, 95% were purchasers during the previous 12 months. Of those, approximately half also sold properties during this period.

Whether buying or selling, a large majority of the respondents utilized two or more types of transactions; e.g., auctions, sealed bids or direct negotiated sales. Negotiated sale was the overwhelming method of choice, with nine out of 1 0 using this method.

Fig. 1 illustrates the relative, recent use of each of these sales methods. Although this was a survey of interested, potential purchasers, 13% of survey respondents indicated that they also had properties to sell currently.

BUYING PREFERENCES

Although one might expect any potential buyer to have a distinct preference for oil properties over gas properties, or vice versa, the results of this survey did not bear that out.

Eighty-seven percent were indifferent as to whether it was an oil or gas property. Only 6% were seeking gas, properties only, and 7% were seeking oil only.

Although the desired acquisition price range varied from just $7,500 to $500 million, the preferred acquisition size was predominantly clustered in the $1-10 million range, as shown in Fig. 2.

Since respondents were active in the oil and gas business and were not, for the most part, nonindustry investors, they were largely indifferent as to whether a property was operated.

An interesting result was that 10% of the survey participants wanted to purchase nonoperated properties only and had no interest in assuming operations (Fig. 3).

The potential buyers surveyed have distinct geographic preferences. Given the geographic distribution of the respondents, it is not surprising that over three-fourths were looking for properties in the Midcontinent region.

What was somewhat surprising, though, was that they were also seeking properties over a wide area outside of the Midcontinent region. As a group, they were looking for oil and gas properties in eight other separately identifiable producing areas in the U.S. Lower 48, ranging from the Pacific Coast to the Northeast and Alaska and into Canada as well.

Most of the respondents (93%) were looking for producing properties; however ' many of these same companies were seeking royalty interests (36%), minerals (22%), and gathering systems (17%), as well. They have much less interest in acquiring leases, including federal leases, or farmouts in today's markets, which undoubtedly reflects a reduced interest in drilling activities.

As expected, the survey results indicated an overwhelming preference (97%) for primary production, but there is also strong interest in waterflood (46%) and recompletions (36%). There is even significant interest in stripper production, since 28% of those surveyed expressed an interest in these low volume producers.

TODAY'S MARKET

Based on these results, it is clear that the market for oil and gas properties in the U.S. today operates somewhat haphazardly. Until the market evolves to a form with more structure, the situation is unlikely to change.

Nevertheless, despite the market's flaws, there is considerable acquisition activity at the present time.

Given the breadth of characteristics of today's buyers and the range of responses, there is potentially a buyer for any property, regardless of its price or location, whether it is operated or not, or whether it is producing gas or oil.

At present, there is not one single region where buyers are focusing their efforts. Buyers seem to be more concerned about the quality of the property than about its location.

Buyers also seem to be indifferent when it comes to purchasing operated properties, although if given a choice, the largest majority would most likely prefer to operate. Nevertheless, there are many potential buyers who have no interest at all in acquiring operated properties.

Despite their wide-ranging interests, many potential buyers did, in fact, express some focused preferences. For example, most buyers prefer to buy through a direct negotiated sale rather than participate in the more competitive sealed bid or auction processes.

Additionally, these potential buyers showed a strong preference for property values in the $1-10 million range and for producing properties.

Many industry observers believe that the larger companies are systematically disposing of a large number of U.S. domestic properties and investing the sale proceeds elsewhere and that this trend is accelerating.

Therefore, the search for interested buyers will become more commonplace. The sheer number of properties for sale will expedite the need for and emergence of a more orderly secondary market for oil and gas properties.

Copyright 1991 Oil & Gas Journal. All Rights Reserved.