Most industry participants and close observers know that 2009 was a down year for A&D asset-transaction volume. Compared to the previous two high-transaction-volume years, 2009 was dramatically down in the number of deals closed (-30%), aggregate transaction value (-60%) and the average deal size (-50%).

Valuation multiples (based on daily production) also fell dramatically in 2009 vs. 2008. Based on statistical analysis of empirical transaction data, an average crude oil deal with a 15-year reserves-to-production ratio (R/P) sold for $75,250 per barrel of oil equivalent (BOE) per day in 2009 as compared to $95,000 per BOE per day in 2008, a decrease of more than 20%.

Similarly, an average natural gas deal sold for $8,400 per thousand cubic feet equivalent (Mcfe) per day last year vs. $16,700 per Mcfe per day the previous year, a 50% decrease.

One statistic that bucked the down trend was the greater number of oil deals that closed in 2009 vs. 2008 (+90%). If nothing else, 2009 should be known as the comeback year for crude oil assets and the relative disfavor of conventional natural gas reserves.

Activity outlook. One question now is…what will 2010 look like in terms of A&D activity? Most interested parties are expecting a healthy transaction volume increase in 2010 as compared to 2009. Higher commodity prices, an improving or at least stabilizing U.S. economy, and a modest improvement in capital availability are positive factors, but the old adage, “If you don’t drill for or buy reserves, you are slowly going out of business,” suggests to some observers that 2010 will be more active than 2009 if for no other reason than it has to be, for self-preservation.

The current year is already shaping up to be interesting because of two corporate acquisition/merger deals announced late last year and expected to close early this year: ExxonMobil Corp./XTO Energy Inc. and Denbury Resources Inc./Encore Acquisition Co.

The ExxonMobil acquisition of XTO is structured as an all-stock transaction with an announced value of $41 billion. Assuming it closes, this mammoth single transaction will be more than 2.5 times larger than the total aggregate value of all A&D asset deals closed in 2009. The Denbury merger with Encore is a cash (30%) and stock (70%) transaction valued at approximately $4.5 billion when it was announced in November 2009. The buyers of these deals tout new “core areas” with significant “resource base” reserves yielding lucrative exploitation opportunities.

Value doubled. When ExxonMobil announced it was buying XTO in December 2009, it said it believed XTO’s current proved reserves totaled 13.9 trillion cubic feet equivalent and its current net daily production was 2.3 billion cubic feet equivalent (Bcfe) per day—yielding a pseudo reserve life (R/P) of 16.6 years. The valuation multiple (transaction value/current net daily production) is $17,826 per Mcfe per day and is approximately 97% higher than the average natural gas asset deal with a similar R/P done in the last 12 months.

An interesting statistic is that an average natural gas deal closed as recently as 2008 with the same R/P as the XTO deal sold for $18,300 per Mcfe per day, or 3% higher than what ExxonMobil is paying for XTO now.

Denbury announced that Encore had total proved reserves of 186 million barrels of oil equivalent and daily production of 41,652 BOE per day, suggesting a pseudo reserve life of 12.2 years and a valuation multiple of $108,038 per BOE per day. This compares to a valuation multiple of $68,300 per BOE per day for an average oil deal with a similar R/P sold in 2009.

Whether or not overall shareholder value is enhanced or created when one public company buys another is an argument for another day, perhaps—only time will tell. One thing is certain: when these types of corporate mergers and acquisitions are announced and closed, brokers, advisors and lawyers are happy, because of the positive signal it sends that they will probably be busy in the near future.

—Charles M. Lapeyre,
Energy Spectrum Advisors Inc.
(214-987-6100)