John S. Herold, Inc.

July 25, 2005 11:11 ET

2004 Global Upstream M&A Deal Value Records First Notable Increase since 1998

HOUSTON--(CCNMatthews - Jul 25, 2005) -

Global M&A upstream total transaction value in 2004 demonstrated its first notable increase since 1998 against a background of record nominal oil and gas prices, according to the 2005 Global Upstream M&A Review prepared by John S. Herold, Inc. and Harrison Lovegrove & Co., Ltd. This review provides a comprehensive analysis of more than 1,000 significant upstream transactions valued at nearly $360 billion that were consummated over the five years through year-end 2004. In a joint letter, Arthur Smith, Chairman & CEO of John S. Herold, Inc., and Martin Lovegrove, Chief Executive of Harrison Lovegrove & Co., Ltd., said, "Our goal in this research initiative is to draw attention to emerging trends, market valuation measures and shifts in regional and international transaction volumes, values and activity in the global M&A&D marketplace."

Fundamentals of the 2004 Upstream M&A&D Marketplace

While transaction dollar volume remained significantly below the levels at the turn of the century, the period of the mega-mergers, the value of transactions in 2004 jumped by 50% over that seen in 2003 to more than $68 billion for both corporate and asset deals. Total proved reserves transacted more than doubled to 19.7 billion barrels of oil equivalent (boe).

Spurred by the consolidation in the U.S. natural gas sector and a rebound in Canadian activity, North American transactions spiked upward to represent 56% of worldwide activity (versus a five-year average share of 43%). In the International arena, the total transaction value grew but deal prices were depressed by the deals done in the Former Soviet Union (FSU), where large volumes were transacted at low prices.

A Tale of Two Markets: North American Versus the Rest of the World

North American deal count spiked to its highest level in five years, although it remained below the 10 year peak as some companies have been reluctant to sell properties that are providing strong cash flow and that are contributing to meeting production targets. Outside of North America, deal count was flat although the average deal size increased, with an emphasis on higher risk, higher reward regions.

The gap between North American implied reserve values and those in the rest of the world widened in 2004. Overall weighted average North American implied reserve value dipped slightly from $6.26/proved boe to $6.09/proved boe. However, when oil sands and heavy oil deals are excluded, the weighted average implied reserve value soared nearly 50% to $10.25/boe.

Outside of North America, overall weighted average implied reserve value fell 42% to $1.49/proved boe due to large deals in the Former Soviet Union (FSU). Excluding FSU deals, implied reserve value rose 12% to $3.91/proved boe.

2004 Net Buyers and Sellers

Integrated Oils without U.S. assets, the Super E&Ps, and Canadian Royalty Trusts were the largest net buyers in 2004. State-owned or controlled entities were the largest net sellers in 2004, disposing of nearly $6 billion more in assets than they purchased. The International Integrated Oils (Super-Majors) and Private Oils each shed more than $4 billion in net assets.

Royalty Trusts Drive Canadian Activity

Transaction value in Canada more than doubled to over $10 billion, 15.7% of total worldwide value. While weighted average reserve value fell to $3.28/boe on select oil sands and heavy oil transactions, the median implied value nearly doubled to over $15.00/boe as trusts competed for assets divested by a broad variety of sellers.

U.S. Implied Reserve Values and Deal Count Soar

Friendly takeovers of Rocky Mountain-based producers spurred a more than 50% increase in U.S. transaction value to $28 billion, or nearly 41% of total worldwide transaction value. The weighted average implied reserve value reached a record $8.91/boe. Natural gas reserves continued to be the primary acquisition target, at 67% of total reserves.

Founded in 1948, John S. Herold, Inc. is a specialized research and consulting firm focusing on valuation, strategy, and performance measurement of the world's leading oil and gas companies. Herold closely monitors the world's energy capital markets and the dynamic merger, acquisition, and divestiture market for energy assets.

Harrison Lovegrove & Co., Limited is a London, Houston, Calgary, Perth and Moscow based oil and gas corporate finance advisory firm. It has a well recognized group of professionals who are focused on advising upstream oil and gas companies in developing their businesses through acquisitions, divestitures, swaps of assets and subsidiaries, and the takeover and defense of listed companies.

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