Acquisitions of entire companies were more common than producing-property purchases in 2001, despite that it was not a good year for oil and gas by most measurements. "E&P equities in general underperformed a weak stock market," says David L. Bole, vice president of corporate research and development, Randall & Dewey Inc., Houston. "The widely anticipated bull market in natural gas disappeared in the wake of the recession, and the meltdown of Enron Corp. shook investor confidence in the merchant-energy sector. This put a huge damper on demand for gas-fired electric generation." Still, it was a strong year for E&P dealmaking. "We recorded 35 transactions greater than $100 million in size, with the U.S. asset portion totaling $44.5 billion for an implied reserve value of $7.74 per barrel of oil equivalent. It was a very robust year," he says. Ken Olive, president of Oil & Gas Asset Clearinghouse Inc., Houston, says pure acquisition and divestiture activity slowed. "A fair amount of corporate deals were completed, but from a negotiated-transaction standpoint, only a few good packages came out." Auctioned properties tended to have higher values, but were fewer in number, he adds. "Basically, we saw some outstanding results toward the end of the year as more quality properties came into a hungry marketplace. Reserve replacement through the drillbit always has been tough. The marketplace has been starved for quality opportunities to replace reserves through acquisitions." A lot of privately held properties were offered during first-half 2001 when oil and gas prices were higher. "It provided an exit opportunity, particularly for properties that were subject to producer financing or mezzanine funding," Olive says. This year, with commodity prices at more normal or lower levels, more producers will report fewer reserves to the Securities and Exchange Commission. "That will help a lot of them come forward because they won't be struggling so hard to replace reserves at high prices. A lot more properties won't make the cut and will wind up being offered publicly and privately." Hal Miller, managing partner of Cornerstone Ventures, Houston, says, "In terms of the number of transactions, we've seen activity slow fairly significantly the last couple of years. At the same time, total value has increased because the number of large deals, involving more than $1 billion, has gone up. This has come at the expense of bread-and-butter transactions, however." He expects fewer large transactions now because, "frankly, we're running out of candidates. I expect the business to revert to the mean, which would be several hundred transactions totaling $10 billion." Harrison Williams, executive vice president for Albrecht & Associates in Houston, says, "The volatility seems to have come in shorter cycles the last five years, and that paralyzes asset markets. It makes it very tough to get anything done." This year, even if prices remain volatile, he expects several factors to overwhelm that influence and create more asset sales. One of these is the fact that several companies already are trying to restructure so they will appear less like Enron, and some of the larger combinations finally may realize that they need to shed assets and concentrate on core operations. "I look for a great deal of that kind of activity to create a food chain trickling down to smaller companies." The year-to-year plunge in North American gas prices clearly has increased pressure on several producers. "It happens historically. When producers experience higher commodity prices, they take on debt. When prices come down, their leverage ratios grow worse and banks put pressure on them. That accounts for some of the smaller deals." But Williams does not expect depressed commodity prices to produce a burst of property sales this time. "Balance sheets are in better shape because producers have not leveraged to the extent they did in 1997," he notes. "While some smaller companies may feel financial pressure to sell, I think more transactions will result from asset rationalization." -Nick Snow