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

HOUSTON -- 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.

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.

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.

European Deal Count Highest in 5 Years

Europe accounted for 13% of total worldwide transaction value, 65% above its five year average. North Sea transactions accounted for nearly 70% of the region's total, while OMV's purchase of a 51% stake in Romania's Petrom was the largest transaction at $2.9 billion.

Russia Dominates Asia-Pacific

The Russian government's seizure and subsequent sale of Yukos' main producing unit to a transitional financing entity represented nearly 60% of the region's $16 billion transaction value. Outside of the Former Soviet Union, deal activity fell and the weighted average implied reserve value was flat at $2.38/boe.

South America Quiet, Africa on the Rise

Central & South America recorded just 0.4% of the worldwide total, depressed by the ongoing political and economic instability in the region. Africa & Middle East region accounted for 4.9% of the worldwide total transaction value but was an area where there were signs of increasing deal activity, most notably in Algeria and Mauritania. Once again there was limited secondary activity in the Middle East.

On The Horizon

The strong wellhead prices the world is seeing have created conditions where companies are facing opportunity constraints. As companies have become increasingly cash rich and remain under pressure to continue growing their production levels, they have become less willing to recalibrate their asset portfolios - today even marginal and mature properties are generating substantial cashflows. In order to secure acquisitions, many companies are having to relax their technical and economic valuation criteria as well as broaden their geographical focus. Outside the U.S., the M&A scene is also witnessing the rise of a new set of determined players, the powerful state owned or controlled companies which are prepared to be aggressive in their purchasing assumptions and to leverage their Government's support to enhance relations with the host Governments where the assets are located. Some companies frustrated by not being able to grow through asset acquisitions are increasingly looking at the merits of growing through corporate acquisitions.

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.