The present marketplace for upstream oil and gas assets is "very slow" as the only sellers are companies that must sell because of liquidity needs or to clean up their balance sheets, says A&D investment banker Rob Bilger, managing director with Tristone Capital. "It's a very slow marketplace right now. A number of companies are looking at company acquisitions and merger potential because of relative valuations and a scarcity of quality properties on the market." Bilger says Tristone was anticipating the most active A&D market ever for the fourth quarter as 2008 blazed along at a record-setting pace through the first three quarters of the year, with Tristone closing on transactions in the U.S. totaling more than $7 billion through the first nine months. But that all changed when the credit markets went into turmoil in September. "When the cost of capital increased and capital availability evaporated, the markets just shut down," he says. Tristone capped its year on Sept. 30 with an $873-million cost-adjusted deal for Cordillera Energy Partners, which sold Buffalo Wallow and East Texas/northern Louisiana assets to Forest Oil Corp. That deal is the last significant A&D transaction that has closed, other than Statoil's joint venture with Chesapeake in the Marcellus. In addition to a lack of capital availability for doing deals, he says the precipitous fall in commodity prices since the summer has left an enormous overhang of failed property sales. He estimates transactions valued at more than $8 billion either failed or were pulled from the market in fourth-quarter 2008. "Companies could either continue their offerings with a major gap between seller expectations and what buyers were willing to spend, or they could just pull the property." That disconnect has left a fallout of frustrated sellers, some that had anticipated selling to take advantage of high commodity prices or beat an anticipated increase in capital gains rates, and those that need to sell to fund capital expenditures. Bilger sees the asset drought lasting at least through the first quarter and possibly longer. "It's all about capital right now-the lack of capital availability or the high cost of capital. We're seeing some debt offerings get done now, which is encouraging. A couple of companies have recently been able to raise substantial public debt." Devon Energy Corp. raised $1.2 billion in notes at 6% in January and El Paso Corp. raised $500 million at 15% in December. Debt markets "have opened up a bit from where we were just a couple of months ago," says Bilger, "but it's still a relatively high cost of capital. Banks are still reluctant to get aggressive with their lending for property acquisitions." January brought renewed activity from potential sellers at Tristone. "These are companies that feel compelled to sell to fund either high-return capital projects that they wouldn't be able to otherwise or make debt repayments. These asset packages likely won't be available until the second quarter." Companies will also soon face added pressure from banks as borrowing base redeterminations based on year-end reserves and price forecasts squeeze cash availability, but Bilger believes the fallout will be limited. "We're not going to have significant forced sales, but I do think there will be pressure from the banks to reduce debt and cut expenditures." So will borrowing base redeterminations throw a flood of assets into the marketplace as cash-strapped companies look to raise additional funds? "There's a mixed view on that. I've been told by a lot of people in the industry that we're going to be swamped this year with property divestitures, but we haven't seen it yet." Those that do sell will first look to divest their conventional assets to focus their financial resources in the new resource shale plays. "Companies are going to clean up their portfolios first by selling their non-strategic traditional assets and prioritize expenditures on their new resource plays because of higher rate of return drilling and the need to hold the leases." Bilger notes a polar shift occurring in buyers and sellers. "The private companies---especially the private equity-backed companies---were the big sellers the past couple of years. Buyers have been the more aggressive mid-size and large independents. Now those roles are reversing. The highly leveraged independents are going to be sellers going forward, and companies with access to private equity and some debt capacity are going to be the likely buyers." He says Tristone is talking with private companies looking opportunistically at the marketplace and with well-funded independents and majors that have strong balance sheets. "There are definitely buyers out there looking for attractive strategic transactions. However, they want to be careful that they don't act too soon and that they wait for the right opportunity." This environment could encourage companies to seriously consider mergers. With corporate valuations at their lowest levels in years, companies in strong financial positions see opportunities to buy companies to acquire attractive assets at a reasonable cost. "They see synergies available by combining organizations and cost structures. It may be that the target company is over levered and doesn't have enough cash to exploit its assets, and the acquiring company with a stronger balance sheet can do so. There are certainly people looking at potential M&A transactions." What will 2009 hold for the A&D market? "It's a bit early to tell," he says. "It depends on how prices react and particularly how credit markets respond. If prices rebound and stabilize and the credit markets continue to improve, then the second half of 2009 could be quite active for A&D."