?Divestiture activity for upstream E&P assets is running unexpectedly high in the face of spiking commodity prices, according to Ken Olive, president and chief executive of The Oil & Gas Asset Clearinghouse.


“Normally, any time you have a significant price movement upward or downward, the industry shuts down on decision making as to whether to sell. In this era of stratospheric price movement, we have not seen a slowdown in activity overall. We have high levels of divestiture activity in general.” Olive spoke to IPAA and Tipro members in Houston recently.


Valuation metrics will continue to move upward in tandem with price movement, he said. The obvious impact of high commodity prices on A&D is that fewer barrels are being sold for more money. “(Deal) prices have just gone up,” he said.


Strong Nymex prices, however, are providing a safety net for investors, he said, resulting in a comfort with the valuations. As an example, the margin in 2002 for prices paid for reserves as compared with the Nymex strip was $2.69 per thousand cubic feet. In late 2007, that margin had grown to $6.33.


“This price arbitrage is just one of the reasons it’s still a good buyer’s market and why you have active and aggressive buyers today.” This, coupled with tax uncertainty, “equals a lot of A&D activity.”


Supply of assets on the market increased significantly toward the end of 2007 related to what Olive calls “The Obama Factor,” a phenomenon sparked by a response to the campaign rhetoric of the Democratic presidential candidates.


“If you don’t believe it, go to Midland, and talk to producers there. They are all selling because they’re convinced there’s going to be some negative tax implications in terms of capital gains or windfall profits taxes—regardless of the outcome of the upcoming elections.”


Closing ratios also have not diminished. “In our shop, they’ve only gotten stronger. A lot of people think there’s a chasm between sellers’ expectations and buyers’ willingness to pay, but we are not experiencing that.”


Regions experiencing the strongest metrics based on deals closed through the Clearinghouse include the Permian Basin, East Texas, the Midcontinent and the Rockies.


In the Permian, cash-flow multiples are very strong based on the long-lived assets. East Texas is “a little less per barrel in the ground,” he said, because most are resource plays in which down-spacing drives down the price per barrel. Deal valuations there in excess of $58,000 per net daily barrel stand in contrast to when “$10,000 was your benchmark.”


Too, “the Midcontinent is clearly in favor and the Rockies are incredibly strong. I’ve been ?impressed with Rockies valuations all year long,” he said.


In spite of the robust A&D activity, some assets are out of favor, primarily assets that are high-rate, short-lived and conventional, such as the Gulf Coast and Gulf of Mexico.
“That’s not to say they’re not good prospects, but they are out of favor and may represent an excellent buying opportunity at this time.”


Resource plays will continue to be favored by the capital markets as long as prices hold. “It’s just a manufacturing process,” he said. “It’s very predictable. The capital markets understand it and they like it.”


So where are the bargains? Conventional plays, not resource plays, he says. “We see a big difference in the price paid for oil reserves versus gas. Gas is two times or greater than for oil right now on a Btu-equivalency basis.”
Old producing areas also deserve a new look. Shallow formations with established producing wells often have many undrilled locations.


Asset packages that don’t fit a buying model might hold opportunity. A package with a mix of operated and nonoperated properties might be disqualified because not all assets are controlled, but “you can buy it and spin off the piece that you’re not interested in.”


Private equity is available at levels that have never been seen before, as much as $25 billion, according to some reports, and Olive believes it is probably greater.


“There is clearly an abundance of capital. The problem is, where do you spend it? A lot of that money is going toward backing management teams in almost a blind-pool fashion.”


Institutional capital is flowing into the sector from other areas such as real estate, he said, and foreign investors, including Canadians, are looking for ways to capitalize on the devaluation of the dollar and get into a stable oil and gas environment.