Prices for U.S. oil and gas reserves continue to strengthen-one producer plans to pay an eye-popping $100,000-plus per flowing barrel of oil equivalent (BOE). And at press time, a deal was announced for Gulf of Mexico reserves for some $3.40 per proved thousand cubic feet equivalent (Mcfe). In the former deal, Denver-based Whiting Petroleum Corp. is paying some $100,000 per flowing BOE for Midland-based Celero Energy LP's approximately 8,000 BOE per day of production in the Permian Basin and Oklahoma Panhandle. The deal comes with some 734 billion cubic feet of gas equivalent (Bcfe) of proved reserves, making the price per proved Mcfe look more comfortable: $1.09. In the latter, Denver-based Forest Oil Corp. has agreed to sell its 344 Bcfe of Gulf reserves to soon-to-go-public, Houston-based Mariner Energy Inc. for $3.40 per proved Mcfe. Houston-based Randall & Dewey reports that first-half 2005 U.S. deal activity involved 120 transactions (18 stock, 102 asset) for a total of $21.2 billion ($9.9 billion stock; $11.3 billion asset). Deals in all of 2004 totaled $29 billion. Stock deals in first-half 2005 were at an average cost of $11.53 per BOE of proved reserves; asset deals, $12.97. The figures are the highest average price paid for as long as the firm has tracked the data-since 1990. The first-half 2005 figures are compared with the former all-time-high average that was set in 2004: $10.08 per proved BOE for stock deals and $9.03 for asset-only transactions. Despite the rising cost for assets, M&A advisors don't see deal-flow slowing anytime soon. Only a sharp change in the futures market-making both potential buyers and sellers skittish about deal price-could soften the pace. Meanwhile, buyers and sellers continue to have common expectations, says Bill Marko, a managing director with Randall & Dewey. "The buyers have kept pace with changing prices for assets, and they have been astute in evaluating and managing risk. Some time ago, potential buyers would have sat on the sidelines because commodity prices were volatile, but today they're staying in [the game]." Increased use of price-risk management helps support deal economics. "With more sophisticated risk-management tools, buyers are not burdened with old paradigms," Marko says. The pressure on U.S. asset prices is coming from myriad sources: • U.S. independents. Some independents aim to bulk up for what they expect will eventually be a long winter of poor opportunities to find U.S. oil and gas reserves. These independents are rounding up assets-especially long-life reserves-with a goal of being among the last independents still standing many years from now. Others are buying their way to favorable year-end reserves and production figures. Some simply have piles of surplus cash, few capex ideas, and little or no debt, and their shareholders expect them to stay in the U.S. E&P business. • U.S. start-ups. Newcomers and recent sellers of upstream assets are seeking starter acreage and opportunities from which they may build and exit-some for a fourth or fifth time. • Capital. Ultimately, the greatest cause of growing demand for U.S. upstream assets is strong investor appetite, resulting in billions of dollars chasing relatively few opportunities. In the public-securities market, where E&P stock prices are high, acquisitive E&P companies can sell shares today at some three times their two-years-ago value and pick up today's three-times-larger bill for assets, resulting in no net difference in the number of shares issued. • Non-North American producers. Charged with diversifying their portfolios, E&P companies headquartered abroad are increasingly showing up in asset data-rooms in Houston and Denver-and making winning bids against potential U.S. buyers. • Canadian royalty trusts. Prices for western Canadian assets are being pushed ever-higher by prolific Canadian royalty trusts and by junior E&P companies, causing some trusts to look harder at opportunities south of the border that pass their unique tax-related cost hurdles. "The reasons for Canadian trusts to look at expanding their asset base into the U.S. are strong," says Sylvia Barnes of Petrie Parkman & Co., which advised privately held, Dallas-based Lyco Energy Corp. on its pending sale to Enerplus Resources Fund. At press time, Enerplus was plunging in with plans for the $421-million acquisition of Rockies-focused Lyco, picking up 22.5 million BOE of proved reserves for an average of $18.71 per proved BOE and $3,500 per net acre. Canadian trusts were interested in Denver-based, EnCap Investments et al.-backed Medicine Bow Energy Corp. too, which Houston-based El Paso Corp. purchased for $834 million this summer. The deal comes with some 383 Bcfe of proved reserves, mostly in the Rockies and East Texas, for an average cost of $2.18 per proved Mcfe. "There are limited significant asset-acquisition opportunities for the trusts in Canada," Barnes says. "They are also under pressure to reinvest and continue growing, and they have a relatively low cost of capital." Rob Bilger, Houston-based executive managing director, A&D, for Tristone Capital Inc., says, "The trusts are opportunity-constrained in Canada. We are actively marketing U.S. packages in Calgary and expect them to increase their presence in the U.S. A&D market." Liquidity Producers' tremendous liquidity, coupled with ready access to capital from both public and private markets, is helping to make the price tags for assets do-able. Some private producers are finding an expedient capital-raising solution in the 144(a) form of equity issuance. This summer, managers of the Calpine Corp. E&P business unit raised $725 million in a 144(a) equity offering to institutional and hedge-fund managers and $325 million of credit-facility debt to buy the parent's U.S. upstream assets for some $1 billion, forming Rosetta Resources Inc. "A spin-off would have taken months," Bill Berilgen, Rosetta chairman, president and chief executive, told industry members at a recent program in Houston. "We were given 60 days and we raised $800 million of private equity in the midst of having three or four companies parked in San Jose [California] trying to buy [the assets]." Rosetta won 383 Bcfe of proved reserves, for an average cost of some $2.50 per proved Mcfe, primarily in the Sacramento Basin (170 billion) and South Texas (169 billion). The balance is in the Rockies and Gulf of Mexico. Mariner Energy, which plans to buy Gulf assets from Forest and double in size, is also a child of the 144(a) fund-raiser. Serial sellers While some privately held producers are on the IPO track, others are cashing out. Outside of some select public-company asset sales, the majority of assets available in the U.S. are being offered by privately held companies, Bilger says. "A lot of these assets are early in their development life-cycle. Many of the assets have a considerable amount of development-drilling remaining." Celero Energy, which is selling to Whiting Petroleum, amassed its 734 Bcfe of proved reserves (43% developed) in less than two years. The buyers are primarily public companies wanting upside. "The public companies continue to pursue reserve growth and production growth," Bilger says. Kevin Neeley, a managing director with Wells Fargo Energy Advisors in Houston, also notes that private start-ups are monetizing quickly. "It used to be that their life-cycle was three to seven years. That deal cycle has been shortened to 18 months to three years." While there are serial sellers, there are serial buyers too. These include Chesapeake Energy Corp., XTO Energy Inc. and Whiting Petroleum Corp. "They're looking for onshore, repeatable plays with a great deal of upside." This has resulted in a shift in public-company acquisitions to include a larger portion of proved undeveloped (PUD) reserves. Why don't the buyers build oil and gas reserves by finding them? "These private start-ups have already assembled these packages and put a bow on them," Neeley says. "This doesn't mean these buyers are not doing prospect-generation. They're doing a great deal of prospect development." Large deals Large asset sales by bigger companies have been unique situations-and often based on strategic changes, such as Kerr-McGee's upcoming U.S. divestments as a result of shareholder pressure, and EnCana Corp. and Forest Oil's portfolio restructuring that resulted in an exit from the Gulf of Mexico. Public-public, corporate mergers remain scarce. "If commodity prices decline, there would be more corporate deals," Marko says. "We would find out who's weak and who's strong and who has dry powder." Potential buyers are aplenty, according to Adrian Goodisman, a Houston-based managing director for Scotia Waterous. At press time, the firm was marketing a variety of packages, including for Kerr-McGee, involving production of approximately 7,300 BOE per day in South Texas, the Rockies, the Anadarko and Permian basins and on the Gulf Coast. "We have a revolving door to our data-rooms," Goodisman says of interest in the Kerr-McGee assets. "We are having two or three viewings a day." The firm also works closely with Canadian royalty trusts and Asia-based prospective buyers of North American assets. Goodisman says Asian interest and optimism in assets abroad have not diminished since the hostility CNOOC Ltd. experienced when it bid for Unocal Corp. "Unocal was a unique situation, given the size and circumstances," Goodisman says. "Nothing has changed in terms of their interest in smaller opportunities." Small deals Small asset deals-under $100 million in price-continue to be relatively few compared with several years ago, says Scott Johnson, a co-founder of Houston-based financing advisory firm Weisser Johnson & Co. Smaller packages are harder to find because, quite simply, asset prices have grown-for example, a package containing 50 Bcfe of proved onshore U.S. reserves would cost more than $100 million today; four years ago, it would have cost some $50 million, he says. Producers are putting fewer small packages on the market. "In the high-commodity-price environment, every property is profitable to every company today. "Buying production in itself does not work. Really, you need to buy development-PUD and even probable drilling opportunities-so buyers are paying significant value for PUD locations. To make any kind of return today, you have to look at PUDs. The return on producing reserves (PDPs is just so low-in the single digits-that people can't make a living on it." To come during the rest of 2005 and into 2006? Goodisman says, "You will see several deals shortly in which the sellers would like to close by year-end. Some asset owners, particularly private producers, are concerned that commodity prices will not hold up after year-end and hope to exit at the top of the current cycle." Barnes believes prices for U.S. upstream assets will continue to be robust, specifically while the spread is wide between the asset-acquisition's cost and forward prices. Several years ago, an Mcf of U.S. proved reserves would get an average of $1 on the market while the futures price was between $2 and $3-for a spread of $1 to $2 per Mcf. Today, that Mcf may get $2 to $3 on the sale block and more than $9 on the futures market-for a spread of more than $7, she notes. Rosetta's Berilgen, at the helm of a newly formed, $1-billion-market-cap E&P company, says he will consider acquisitions-carefully. "I'm nervous about the current acquisition market," he told Houston-based industry members. "When there are 50 companies bidding, I'm just worried I'll be the winner. It makes me think I did something wrong, that I need to go back and check my numbers."