It's a new year without any M&A in it-yet. Soon, we'll learn how publicly held upstream companies fared in their year-end compliance with Sarbanes-Oxley 404, and the corporate-transaction games will recommence. E&P companies can feel free to marry other companies-for better compliance systems or worse. For those looking to take the plunge, there may be more corporate-transaction opportunities on the market. The likely victims of these hard-to-love, expensive, financial-reporting IT systems that companies have had to suck it up and buy into will be the smallest of the publicly held companies. Those with market capitalizations of under $700 million have received a brief, 45-day extension on their SOX 404 compliance deadline; those under $100 million have until year-end 2005. Between now and year-end 2005, watch for falling small-caps. Some of these takeover targets will be "audit orphans," or companies that have been rejected by spread-thin audit firms for needing too much love. "I hope the [SOX] pendulum will be viewed as having swung too far and will swing back before it does too much damage like a wrecking ball," Petrie Parkman & Co.'s Sylvia Barnes said at Oil and Gas Investor's inaugural Senior Financial Officer Executive Forum in New York in December. And, while some small-caps may throw in the towel; others may never endeavor to enter the game. On the same panel, Jay Lathen, senior vice president, natural resources M&A, for Lehman Brothers, said the capitalization for entry to public markets has been $250 million but SOX requirements have raised the realistic hurdle to $450- or $500 million. Warren White, founder of asset-valuation firm Avail Consulting LLC, said SOX compliance may fail a cost-benefit-analysis test. "People are discounting the amount of time taken away...There is a lot of [productive] work that is not being done...America doesn't need something else that is less productive." Its only benefit is "if we use this as a way to houseclean," he concluded. There are many prospective asset buyers across North America and abroad that are anxious to sweep up. It's just the first quarter now, and 12 months are on the clock. Either commodity prices will continue to reign strong, and buyers and sellers will easily agree on transaction prices. Or, they will begin to trend sharply up or down, creating renewed gridlock at the valuation table. Asset-transaction firm Randall & Dewey Inc. reported the following in early December on the fourth-quarter score: "While the year is not yet over, the explosion in commodity prices on the heels of [Hurricane] Ivan portends positive performance in the fourth quarter as well. Share-price movements this year have been impressive, but calculations...indicate that equity values have significant room to run before approaching historical fair values." With three-year Nymex strips of $50 per barrel of West Texas Intermediate and $6.50 per million Btu of Henry Hub gas, there was room left for growth in E&P companies' market capitalizations. So who will be the bold buyers? "The market is segmenting between those which continue to invest aggressively and those who are accumulating cash," Randall & Dewey reports. "At some point the reinvestment philosophy for each company will need to be well defined for the market. In the interim, modest share repurchases continue to be announced, adding further support to fundamentally driven valuations." To start the new year, here's one of the newest M&A expressions, courtesy of Barnes: "PUD creep." Barnes says, "Wall Street is rewarding PUDs to a greater extent." She cited the Chesapeake-Greystone deal of first-half 2004 as an example. In that deal, Chesapeake paid for a significant number of proved undeveloped reserves. "You wouldn't have seen that transaction just a year ago." In the new year, look for more surprises. -Nissa Darbonne, Executive Editor