OVERPAYING?

The pre-2003 market price for U.S. reserves and production may be history-at least for a while. Several buyers conceded in the fourth quarter of 2003 that the going prices weren't falling, and snatched up what they wanted. More than 1.3 trillion cubic feet equivalent (Tcfe) of U.S. reserves-predominantly gas-exchanged hands in the quarter in just 13 of the many deals, a lot of them in the last several weeks approaching year-end. Producers are coming to accept new "normal" market prices, transaction-advisory firms report. One E&P-company business-development professional admits he's thrown in the towel on trying to find "good" prices for good assets. The best he figures he can do these days is not "overpay" for bad assets. "We could overpay for a lot of properties right now. Our strategy now is to overpay for the right property," he says. Larry Harrison, vice president, business development, for The Oil & Gas Asset Clearinghouse, believes higher prices for U.S. reserves are here to stay. It's simply a matter of supply and demand: "They're not making any more of them." North American drilling activity is in decline. What reserves are found are shorter-lived, he says. But, what is "overpaying" to one buyer may not be to another, he adds. "I don't think it's so much 'overpaying' as various companies from time to time feel they need to be competitive [for an asset] to the point of ensuring they win." Today, as has always been the case, "if you want to be the winner, you need to have the sharpest pencils and the deepest pockets." Bill Marko, chief operating officer, Oil & Gas Journal Exchange/Madison Energy Advisors, says he is seeing a mindset-shift among prospective buyers. "There is an acceptance that there is a new 'normal' range of pricing for oil and gas," he says. "A year ago, folks were wondering where [commodity] prices would settle." Throughout most of 2003, oil remained above $26 a barrel and gas spent much of the year above $4 per million Btu. The 12-month Nymex strip for each at press time was about the same. "People are finally subscribing to that," Marko says. Hedging future production for as much as $5 for gas and $30 for oil has helped buyers swallow what they're paying sellers lately. "If you're using a price deck that doesn't have four-something gas in it, you're not going to be competitive," Marko says. The surge in buying this past December reflected some normal year-end reserve-replacement activity, he notes. But it was busier than December 2002 buying. "Activity this past December reflects some settling into a higher price deck," he concludes. Houston-based transaction-advisory firm Randall & Dewey Inc. tallied U.S. deals in the third quarter of 2003 as averaging $8.04 per barrel of oil equivalent (BOE) of proved reserves. The number reflects kicking out an anomaly: the $330-million Triana Energy purchase of more than 1 Tcfe of Appalachian Basin proved gas reserves looked cheap, but the deal included a huge forward-sales contract. Randall & Dewey, and other transaction-advisory firms, were developing their year-end average-price-per-BOE statistics at press time. Meanwhile, A&D Watch newsletter anticipates the fourth-quarter figure will be as high as, or higher than, in the third quarter. The price was higher in just three of the fourth-quarter deals that are among the 13 in which more than 1.3 Tcfe traded hands, and these three deals alone included nearly half of the proved reserves involved in the total. In a $510-million deal announced just before year-end, Chesapeake Energy Corp. will pay $8.28 per BOE for proved reserves in the Midcontinent, Permian Basin and South Texas. In another fourth-quarter South Texas deal, Chesapeake paid $8.46 per BOE. Meanwhile, Westport Resources Corp. paid $8.88 per BOE for South Texas assets. And the forecast for activity in this quarter? While deal volume abated in mid-January, transaction-advisory firms are anticipating an active year. -Nissa Darbonne, Managing Editor