How does one turn a $12 asset minus three years of production into $13.64 or more? Ask any U.S. asset-seller today, such as Devon Energy Corp. Analysts worried three years ago that Devon was buying high when it brought in Ocean Energy Inc. at an average $12 per proved barrel of oil equivalent (BOE). It turns out that Devon was buying low. In recent divestments, after high-grading its total portfolio, Devon has received an average price of approximately $13.64 per BOE of proved reserves. The reserves total 88 million BOE or the equivalent of 16% of what it gained from Ocean Energy. "The expected divestiture proceeds are at the high end of the range we anticipated," says Brian J. Jennings, Devon senior vice president and chief financial officer. U.S. companies that bought assets in western Canada in the late 1990s are also enjoying this phenomenon. They're having to decide whether to continue in Canada as a core area or profit now by selling. Many are selling, such as Calpine Corp., Exco Resources, Pioneer, El Paso and Marathon. Recently, Midnight Oil paid US$14.60 per proved BOE for Vintage Petroleum's Canadian assets and Advantage Energy paid an average US$14.34 for a package from Anadarko last year. It's cheaper to buy in the U.S. than to own assets in Canada. The average deal price in third-quarter 2004 for Canadian assets was US$15.11 per proved BOE and a median US$21.39, according to asset-broker Randall & Dewey Inc. In the U.S., the average was US$9.61. Additional pressures on the U.S. marketplace: Royalty trusts. Canadian royalty trusts are increasingly finding competition for assets in western Canada too thick to make economical deals. "The typical trust has changed its parameters. They're transforming their portfolios because they're running out of stuff to buy," says one crossborder A&D advisor. He asked Provident Energy Trust why it bought California-based BreitBurn Energy. "I wanted to know if they had solved the tax problem. They said 'no,' but at the end of the day, U.S. deal metrics were better than those in Canada, so the acquisition was competitive." One client has asked the firm to slow a data-room process to allow the trusts time to review the assets and work up a bid. "The U.S. process is sometimes too quick for trusts to get up to speed on an asset. Their bids are getting more aggressive as they get up the learning curve. They have not been the highest bidders yet, but they will be in time." Asian operators. Also missing data-room deadlines are many Asian companies, according to Adam Waterous, senior managing director and a principal of M&A firm Waterous & Co. "Outside onshore North America, the most important buyers today are Asian," he says. "They've already been very active. But for onshore assets, they're looking for oil assets, not gas, and they want large reserve plays, such as oil sands." Some are breaking the code. Three Asia-based companies have won North American assets in the past few weeks. Japan's Nippon Oil Exploration Ltd. plans to buy shallow Gulf of Mexico assets from Devon for an undisclosed price. Japan-based Sumitomo Corp. recently won a bid for shallow Gulf assets from NCX for $150 million, involving anticipated 2006 production of 5,000 BOE per day. China's CNOOC was reportedly a top contender for Unocal, which ChevronTexaco is buying for an average of $10.29 per proved BOE. Meanwhile, CNOOC has won a 16.7% stake in Canadian oil-sands operator MEG Energy Corp. for $150 million. MEG's asset is a 100% working interest in acreage believed to contain recoverable reserves of about 2 billion barrels of oil. "The investment hits on our focus on long-term growth," says CNOOC chairman and chief executive Fu Chengyu. U.S.-based operators. And, pressure on the U.S. marketplace comes from U.S. asset-owners themselves. At press time, Chesapeake Energy Corp. announced four deals for Texas assets for an average of $2.40 per proved thousand cubic feet of gas equivalent (Mcfe) or $14.40 per BOE. The company is allotting some of the purchase price to leasehold ($2,600 per net acre) and assigning $1.49 per Mcfe to the proved reserves. The numbers are somewhat unheard of in recent U.S. asset history, and they point to further "probable creep" in asset valuations. One of the sellers, Laredo Energy, was bought out by Chesapeake just 16 months ago in South Texas. The EnCap Investments-funded company had restarted near its former assets. All of this math is right if high commodity prices continue. Chesapeake reports it will hedge the production from this most recent purchase.

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