Cornerstone Ventures LP reports a nearly dormant first-quarter U.S. E&P mergers-and-acquisitions market. Activity declined 30% from fourth-quarter revised figures, the Houston-based M&A firm reports: 33 deals closed, a 14-deal drop from fourth quarter 1999. The first-quarter rate is also 38% slower than the average of first-quarter closings during the past 10 years. Although buyers continue to believe that sellers' expectations are too high, they negotiated favorable deals when compared with prices paid for reserves during the last few quarters, according to Cornerstone. Deal volume and value had declined in 1999 as well, from the record $82.1 billion in 354 deals in 1998 to $47.3 billion in 326 deals in 1999, according to Randall & Dewey, a Houston-based M&A firm. The 1998 volume was already down from that of 1997. As for U.S. onshore M&A activity, it improved 27% in the first quarter from the fourth-quarter 1999 revised figure, Cornerstone reports, with total transactions of $1.856 billion, up from $1.466 billion. But the first-quarter 2000 rate is 58% slower than that of first-quarter 1999. Cornerstone reports 27 transactions in the first quarter, 14 were small that made up 8% of deal value and fell below $25 million. Three were between $25- and $50 million and four were between $50- and $100 million. Six were larger than $100 million. These were more than in the prior quarter but did not show the usual premium for large deals. They made up 74% of deal value and totaled $1.31billion. The lower premium was due to the inclusion of deals involving long-lived Appalachian or Permian Basin properties with generally lower median values and high operating costs. Of the 27 deals for which a value was disclosed, 23 were property transactions ($1.727 billion) and four were corporate acquisitions ($129 million). Cash was used in 93% of the deals to fund them, 7% used stock, and none used debt. Natural gas transactions made up 75% of all disclosed transactions, with a median value of $0.781 per thousand cubic feet. The median value declined 8.5% from fourth-quarter 1999. Oil-deal value declined 11.2% to $4.45 per barrel of oil equivalent from $5.01 in 1999. Permian Basin activity was strong: 51 million BOE traded at a median value of $4.24 each. In the Gulf Coast, 34 million BOE traded hands at a median value of $5.30 each. Offshore, Cornerstone tracked four reserve transactions totaling $250.9 million, up from 10 in the prior quarter totaling $163.2 million. Cornerstone's list of significant first-quarter deals are as follows: Equitable Resources Inc. acquired the Appalachian Basin production assets of Statoil Energy for $630 million; Quicksilver Resources Inc. acquired CMS Energy's E&P assets in Michigan for $163 million; Bargo Energy Co. acquired $161.1 million of Texaco's producing properties in the Permian Basin, Midcontinent and East Texas; Newfield Exploration Co. acquired three properties in South Texas for $141.4 million; and Consol Energy Inc. acquired the majority of MCN Energy Group's E&P Appalachian assets for $104.5 million. Cornerstone partners see the current market as a buyer's market. They see a decline trend in transaction number and in transaction value, despite the increase in commodity price. But they say there are more elements influencing the market than commodity-price skepticism. Lenders are confident in the industry's ability to generate cash flow. According to Madison Energy Advisors quarterly poll of the four largest reserve-based energy lenders, the bankers expect oil prices to average $20.13 per barrel for 2000, up $1.25 from their 2000 forecast that was made in the prior quarter. They expect gas to average $2.32 per million Btu for 2000, up from a $2.33 forecast in the prior quarter for 2000. -Heather H. Read