Following two quarters of virtually nonexistent deal flow in the upstream sector, second-quarter 2009 broke out with a light, but steady, stream of transactions, with more in marketing. “The A&D market is clearly opening,” observe analysts at Tudor, Pickering, Holt & Co. Securities. Now it’s a matter of “just waiting for the faucet to turn a little further before we start seeing some larger transactions.”

Credit availability and stabilization of commodity prices have “unstuck” the upstream asset-acquisition markets from their “moribund levels,” say analysts at Morgan Stanley Research. Yet while transaction activity has picked up, “valuations in the private market are unsurprisingly lagging valuations of the public equities, particularly as the equities look through near-term weakness in commodity prices.”

Highlighting Denbury Resources’ announced sale of Barnett assets to a private firm, Morgan Stanley analyst Stephen Richardson values the assets at $6 per barrel of oil equivalent (BOE) proved and $29,000 per daily flowing BOE, while the stock trades at $21 per proved BOE and $105,000 per daily flowing BOE.

Likewise, analysts at Dahlman Rose & Co. voiced concern that sales are occurring “well below” equity valuations, targeting the Denbury sale as “the second asset sale we have seen…seemingly below equity valuations,” with Range Resource Corp.’s sale in the Permian as the second. They pin Denbury’s Barnett assets at approximately $0.95 per thousand cubic feet of gas equivalent (Mcfe) of proved reserves compared with the company trading at $3.50 per Mcfe. Production sold was $5,860 per flowing barrel, but it is trading at $19,815. “The valuation metrics look cheap,” they say.

Also in the Barnett, European buyer ENI SpA is taking a 27.5% interest in 13,000 core acres from Quicksilver Resources with a 270,000-acre area of mutual interest. Jack Aydin of KeyBanc Capital Markets sees the metrics at $2.14 per proved Mcfe, $16,970 per flowing Mcfe per day, and $78,322 per acre. This compares with valuation metrics in the price Quicksilver paid in July: $3.73 per Mcfe proved, $29,044 per Mcfe/d, and more than $100,000 per acre.

“Considering the current commodity and credit market environment, the company received a fair price,” he believes, “especially when compared to Denbury’s Barnett shale sale.”

But the two deals are apples and oranges, say the Tudor, Pickering, Holt analysts, who see the two transactions as solid metrics for core, versus noncore, Barnett assets: Core gets $2 per Mcfe; noncore $1. They value the ENI deal at $2.15 per Mcfe, and $102,000 per BOE/d.

In the first of two deals in the Permian, Range Resources announced the sale of its Fuhrman Mascho properties to Energen Corp. for $182 million. Stifel, Nicolaus & Co. analyst Michael Hall calculates the transaction multiples at $1.98 per Mcfe proved and $11,742 per daily Mcfe. Like the Barnett deals, the numbers are far below the market multiples for Range of $3.18 per Mcfe proved and $19,600 per flowing Mcfe, but those figures incorporate probable and possible reserves relative to other aspects of Range’s portfolio, he notes, “which are limited at Fuhrman.” As Stifel values proved reserves alone at $1.55 per Mcfe, “the transaction is favorable in that context,” he says.

Analysts at Pritchard Capital Partners value the deal at $11.90 per BOE proved, or $70,000 per daily flowing barrel, “a very healthy number in our view.” Dahlman Rose values Range’s sale at $1.50 to $2 per Mcfe, compared with Permian player Arena Resources’ market valuation of $3.50 per Mcfe. “The broader implications of the sale are concerning.”

Establishing solid metrics in a second Permian transaction, Marathon Oil Corp. is selling its West Texas and New Mexico assets for $301 million to Apache Corp. and Occidental Petroleum Corp. Rehan Rashid of FBR Research values Apache’s $187-million portion of the deal at $7.21 per BOE, versus year-end 2008 future development costs of $12.80. Morgan Stanley’s Richardson places the deal value at $54,000 per flowing barrel.

Richardson says that, despite the overall valuation optics, “we expect the pick-up in deal flow to remain a positive catalyst for the group, particularly for E&Ps looking to reduce leverage and strategically realign the asset base.” Adds Dahlman Rose, “It is clearly a buyer’s market, as it appears it could be enormously accretive for most E&P companies to raise capital to purchase producing assets.”