The severe drop in asset transactions since 2014 has been widely reported. After a record year of $85.88 billion in U.S. asset and corporate transactions, only 10 asset deals—valued at $1.74 billion—were transacted in first-quarter 2015, the lowest amount since 2009. The market began to rebound in the second quarter as the oil price briefly reached the $60 per barrel range, then plummeted to its lowest price in more than six years.
Buyers are looking opportunistically at properties on the market, but unless the seller is forced to make a divestiture, many have chosen to take deals off the market The reserve life of a property (R/P), plotted against the value paid for proved reserves and production for a transaction in a given year, generates asset transaction implied value curves. The accompanying reserves chart indicates that sellers received significantly more for proved reserves in asset transactions in recent years than in 2015.
Recently, 2014 and 2012 were record years for transactions and valuations due to high oil prices, among other things. Valuations in 2013 didn’t keep pace with 2012, partially due to the slowdown in the A&D market as operators cored up their positions in unconventional plays and focused less on acquisitions and more on drilling to hold acreage.
Based on 2015 transactions to date, a property with a 10-year reserve life has been valued by the market near $18 per barrel of oil equivalent (boe). In 2014, it was likely to be valued closer to $28/boe. The gap between 2014 and 2015 valuations narrows as the reserve life increases. The average paid for proved reserves in 2015 to date has been $18/boe, regardless of reserve life. In 2014, the average was closer to $22/boe.
Production metrics in 2015 show a similar departure from recent years. The implied value curve for 2015 indicates that a property with a 10-year reserve life has been valued at approximately $65,000/boe/d, whereas in 2014 it was valued at almost $100,000/boe/d. On average, production metrics are about $57,000/boe/d in 2015, regardless of reserve life. In 2014, the average was more than double at $124,000/boe/d.
The Permian is one basin that is still receiving a premium valuation. Flowing production values for Permian properties averaged $157,000/boe/d in 2014 and decreased to $99,000/boe/d in 2015 to date, well above the averages for either year.
Natural gas prices have declined to lows not seen in three years, and gas–weighted assets have dropped in valuation accordingly, but not as dramatically as oil-weighted assets. Because gas prices have been more stable, some operators are diversifying their portfolios with gas properties. The number of gas-weighted transactions has kept pace with oil-weighted transactions in 2015, which is a departure from recent years when oil has been the coveted commodity.
With such a drop in valuations, the bid-ask gap is very wide between sellers and buyers. This has resulted in deals unwinding, being re-traded or being shelved. Buyers are looking opportunistically at properties on the market, but unless the seller is forced to make a divestiture, many have chosen to take deals off the market until prices rebound or stabilize. In many cases, there is too much uncertainty in the market for buyers and sellers to agree on valuations.
—Karen Jacobson, senior vice president, geosciences, acquisitions and divestitures, Raymond James & Associates Inc.
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