2000 was another healthy year for upstream oil and gas mergers, acquisitions and divestitures despite rising commodity prices and a widening gap between buyer and seller expectations. Except for August, when no major deals were announced, activity involving assets worth $100 million or more was relatively steady. "The first quarter got off to a fast start with several notable acquisitions that set the stage for continued consolidation throughout the year," says David L. Bole, vice president, corporate research and development, at Randall & Dewey Inc. in Houston. A spate of significant second-quarter mergers and acquisitions was followed by a relatively calm third quarter. Then the dam broke. "By midyear, I had expected the upward shift in commodity prices to translate into higher reserve values," Bole says. "Typically, there's a general reluctance to move far beyond established psychological hurdles of $5 per barrel of oil and $1 per thousand cubic feet of gas." Blowing past those benchmarks were megatransactions in the fourth quarter, such as Pogo Producing 's bid for North Central Oil, with an implied reserve value north of $7.50 per barrel of oil equivalent. The result, Bole says, is a two-phase market: larger companies are responding to demands to grow with acquisitions, as several smaller producers take advantage of strong commodity prices to lock in property values "at heretofore unseen levels." An uncertain commodity price outlook was just one of several factors that slowed M&A activity somewhat by mid-2000, according to Clint Wetmore, vice president, marketing, at Madison Energy Advisors Inc. in Houston. "A lot of producers weren't able to access capital for acquisitions. There also were not that many deals to be made," Wetmore says. "Then the flow picked up, hot and heavy, toward the end of the third quarter. Madison had to hire more people to handle the volume. A lot of producers apparently believed that the time was right to consummate deals that had been left on the back burner. But there still was a quandry over whether to retain cash flow or make a deal." While E&P property valuations reflect higher commodity prices, sellers find that buyers won't raise their price decks to a month or near-month on the futures price strip, but look farther out. The gap between producer and banker commodity-price expectations also has widened, sending some purchasers in search of alternatives to straight debt financing, he says. Hal Miller, managing partner, Cornerstone Ventures LP in Houston, indicates that while there were several large deals during 2000, a dearth of available properties and the gap between buyer and seller expectations reduced the number of basic reserve transactions significantly. "In 1999, there was an average of 50 transactions per quarter. I anticipate that the quarterly average for 2000 will be about half that amount. The number of announcements picked up in the last quarter, so I would expect more transactions to close during 2001," he says. Producers always have had to balance finding and acquisition costs, he adds. "Right now, the acquisitions are closing around $6 per barrel, compared with average finding costs of around $4 to $5 per barrel. Buyers understandably wonder why they should pay more for reserves when they can produce them for less. One issue we have encountered is that there is not a lot of open acreage to lease. Some of the transactions involve a purchaser's placing a fairly high value on developed acreage. That can drive offers by capital-rich, prospect-poor producers."