Upstream merger and acquisition activity is booming, with 2005 spending on corporate acquisitions more than tripling to $120 billion as the corporate deal count rose 40% year-over-year, according to John S. Herold and Harrison Lovegrove & Co. Ltd.

Headlining last year’s deal activity were the ConocoPhillips-Burlington Resources (see NGI, Dec 19, 2005) and ChevronTexaco-Unocal (see NGI, April 11, 2005) mergers. Last year also saw continued increase in the value of asset transactions, a trend that has now been evident for five years. Not since the mega-merger era of the late 1990s has the industry seen as high a transaction value in global upstream M&A, according to the “2006 Global Upstream M&A Review” prepared by Herold and Harrison Lovegrove. The review provides analysis of more than 290 upstream transactions valued at $160 billion. The full report will be available in the second half of this month.

North American transaction value grew 30% to $48.4 billion, but it only represented 30% of total global transaction value, down from 56% in 2004 and the five-year average of 38%. Takeovers of significant companies with international portfolios totaled $68.4 billion, or 43% of total worldwide transaction value after several low-volume years. The total value for other transactions outside of North America reached $42.8 billion, a 54% increase over 2004.

Deal values are extremely elevated in North America, said Christopher Sheehan, John S. Herold director of M&A research, noting that there were some pricey transactions last year in both the deep and shallow waters of the Gulf of Mexico. Canadian deal values have been driven up by royalty trust activity. Since the royalty trusts don’t drill they need to grow through acquisitions. “The royalty trusts in Canada are creating competitive pressures there on all the players and raising the acquisition ante.”

Global proved reserve costs tripled to $9.60/boe, up from $3.16/boe in 2004. Outside of North America, proved reserve values soared more than 400% to $8.10/Boe, while North American proved reserve values increased 55% to a record $14.62/boe. The firms said competitive pressures and strong commodity prices pushed buyers to loosen their valuation criteria and regional focus. “The historical lag of implied costs to commodity prices has disappeared as even proved plus probable (2P) values skyrocketed,” the firms said.

Canada was the most expensive M&A region, with 30% of deals completed at a proved reserve value of more than $30/boe. North American transactions were spurred by heavy activity by international companies in the Gulf of Mexico and the Canadian oil sands. Political risk and access issues have made Africa, South America and Asia less attractive to international companies.

National oil companies (NOC) have added significant competition to the market. Their M&A deal volume rose threefold last year. Chinese NOCs were particularly active, while domestic consolidation of Russian firms added significantly to overall NOC spending.

Unconventional resources attracted more attention as coalbed methane deals expanded outside of the United States and M&A investment in tight gas plays, such as the Barnett Shale, continued to increase. Canadian oil sands received heavy attention as key 2005 deals involving undeveloped 3P reserves transacted at implied values that were 40% greater than producing 1P reserves were bringing just two years ago.

For 2006, implied values remain elevated. North American proved reserve values continued to accelerate, reaching more than $18/boe in the first quarter. While the absence of significant corporate deals has limited total transaction value, deal expenditure is still ahead of this time in 2005.

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