U.S. A&D activity in 2011 has trended in line with the historical levels seen from 2006 to 2008. Approximately $33 billion of announced transactions have been completed through the end of the third quarter. Ignoring large corporate transactions (>$15 billion), the normalized total transaction value (TTV) averaged approximately $45 billion per year prior to the 2008-2009 crash. The normalized 2011 TTV is on track to approach the historical $45-billion level.

The key drivers for U.S. A&D activity in 2011 has been strong demand by majors, large independents and international companies for shale and unconventional resources.

Oil- vs. gas-weighted transactions. The decoupling of oil and gas prices in the past several years has influenced A&D activity profoundly. From 2005 to 2009, the oil price traded at a six- to 10-times multiple to the natural gas price. Since 2009, oil has decoupled from gas, trading as high as 25 times the price of natural gas on an equivalent basis.

From 2005 to 2009, a period of parity in oil and gas prices, oil- and gas-weighted transaction activity was relatively on par. Since 2009, however, the relative value increase of oil over gas has dramatically impacted A&D activity. Many companies switched from gas-to oil-focused strategies in 2009-2010, resulting in a higher volume of oil deals compared with gas transactions.

In 2011, the oil vs. gas price ratio has remained high at 25 times, but strong demand for gas properties has closed the gap somewhat between oil- and gas-weighted transactions.

The key driver in this convergence has been international companies’ interest in acquiring unconventional resources in the U.S. and majors making large unconventional gas acquisitions. Majors with a long-term investment perspective view the current gas-price environment as the right time in the commodity price cycle to stockpile gas resources. International companies are also making large investments in unconventional resource plays to learn the latest horizontal well drilling and completion technology and provide a physical hedge for their energy purchases. As a result, gas and oil transaction values have converged again.

Conventional vs. unconventional activity. Unconventional transactions have dominated the A&D market over the past year, garnering more than 75% of total deal value. The average deal size for unconventional transactions has increased dramatically, topping an average $670 million in third-quarter 2011 compared with $128 million for conventional deals.

Technology improvements in the form of extended-reach horizontal drilling and multistage fracture stimulation have unlocked resource potential in unconventional resource and shale plays. At current commodity prices, many plays, particularly the liquids-rich plays, have very attractive economics. The resulting impact on A&D activity has been a rush to acquire unconventional resources.

The shift in deal activity to unconventional assets began in fourth-quarter 2010. Because of the large capital requirements, the buyers of these assets have typically been majors, large independents and international companies. The derisking of unconventional plays is driving this phenomenon, as buyers are placing significant value on probable and possible reserves. Thus, large transactions of greater than $1 billion have dominated the marketplace, accounting for 73% of total transaction value since 2009.

On average, unconventional assets have traded at a significant premium to conventional assets when standard industry metrics are applied over the past two years. Since 2010, unconventional deals have traded at an average $117,000 per barrel of oil equivalent (BOE) per day, while conventional assets have averaged $72,600 per BOE per day.

However, on a proved basis, metrics for conventional and unconventional assets are fairly consistent. Comparing dollar-per-acre metrics for unconventional deals can also be challenging, due to differences in asset and acreage maturity, the amount of proved reserves and the time frame of transactions.

Raymond Wong, BNP Paribas (713-982-1144), ray.wong@us.bnpparibas.com

For details on assets on the market, see A-Dcenter.com.