?The A&D market needs to feel “a bit more pain for a few months” for reality to set in to bridge the gap in buyer/seller expectations, according to Ernst & Young transaction advisor Jon McCarter.


“Multiples are certainly coming down, but if you look at what’s happening with commodity prices and the market in general, we’re still seeing an expectation gap between what sellers expect and what buyers are willing to pay.”


Recent transactions involve either a party that is desperate or a healthy multiple that is attractive to both parties, he says.


Lower commodity prices will result in more corporate consolidations, possibly through unsolicited bids. “For players in a position to be opportunistic, certainly you may see more of that.”


When capital begins to flow again in equity and debt markets, “those companies that have their financial books in order will be in a better place to access capital,” he says.


Deals may still be done with cash on hand. The majors, for instance, have more than $100 billion of cash available and “if they want to get a transaction done, they certainly have the dry powder to do it.” Also, independents may use volumetric-production-payment deals and joint ventures to raise money or reduce capex demands.


“There is money out there. It’s just a matter of matching up the players.”


Private-equity-funded E&Ps are still in the game and will be active, he adds. “They will be more excited about businesses that have less commodity exposure or can be hedged.”


While 2006, 2007 and first-half 2008 set records for transaction activity, third-quarter 2008 activity was down 30% and, at press time, the fourth quarter was experiencing a “stiff decline that could be worse.


“We’re not going to get back (to 2007) levels in a rapid fashion, but we’ll see a pick-up in transaction activity in 2009,” he says. “But it’ll be a far cry from 2007.”

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