ConocoPhillips acquires Burlington Resources for $35.6 billion; set to become leading natural gas producer in North America
Mikaila Adams, OGFJ Associate Editor
ConocoPhillips and Burlington Resources Inc. have signed a definitive agreement under which ConocoPhillips will acquire Burlington Resources in a transaction valued at $35.6 billion. The transaction, upon approval by Burlington Resources shareholders, will provide ConocoPhillips with extensive natural gas exploration and production assets, primarily located in North America. The Burlington Resources portfolio provides a strong complement to ConocoPhillips’ global portfolio of integrated exploration, production, refining, and energy transportation operations, thereby positioning the combined company for future growth.
Under the terms of the agreement, Burlington Resources shareholders will receive in the merger $46.50 in cash and 0.7214 shares of ConocoPhillips common stock for each Burlington Resources share they own. This represents a transaction value of $92 per share, based on the closing price of ConocoPhillips shares on Friday, December 9, 2005, the last unaffected day of trading prior to this announcement. The transaction preserves ConocoPhillips’ strong financial base, flexibility and cash flow, and enables the company to continue its aggressive capital investment program, including the funding of a substantial exploration and production and refining program.
Burlington Resources is an independent exploration and production company. At December 31, 2004, Burlington Resources had total reserves of 2,001 MMboe (million barrels of oil equivalent). In addition, Burlington Resources has estimated 2005 production of approximately 475 Mboe/d (thousand barrels of oil equivalent per day), and access to significant conventional and unconventional resources.
Together, ConocoPhillips and Burlington Resources will have:
Pro-forma reserves of 10.5 Bboe as of December 31, 2004, excluding 0.3 Bboe associated with ConocoPhillips’ Syncrude operations, of which 52% is in North America; and Pro-forma 2005 production of 2.3 MMboe/d, including LUKOIL and Syncrude, of which 50% is in North America.
Jim Mulva, chairman and CEO of ConocoPhillips, said: “The transaction...enhances ConocoPhillips production growth and North American gas supply position both in the near-term, through projects involving conventional and unconventional resources, and in the long-term through LNG (liquefied natural gas) and Arctic gas projects. In addition, the broader Burlington Resources portfolio is an excellent complement to our integrated oil and gas portfolio, and significantly increases our weighting in OECD (Organization for Economic Co-operation and Development) country assets. The transaction will not only provide Burlington Resources shareholders with a meaningful immediate premium to the value of their shares, but also enables them to continue to benefit as investors in the future growth of ConocoPhillips.”
Shackouls
Bobby S. Shackouls, chairman, president, and CEO of Burlington Resources, said, “The combination of ConocoPhillips and Burlington Resources recognizes the substantial value we have created and acknowledges the success of our employees in building a great company with a strong asset base. Of equal importance, this transaction allows our shareholders, customers, and employees to participate in the future growth of ConocoPhillips, a company that has the scale and scope to supply consumers from every facet of the oil and gas industry more efficiently.”
Based on the closing market prices for the shares of both companies December 9, and their debt levels as of September 30, 2005, the combination of ConocoPhillips and Burlington Resources would have an enterprise value of $135 billion ($106 billion of equity; $29 billion of net debt and preferred securities). Existing ConocoPhillips shareholders will own about 83% of ConocoPhillips following the transaction, and Burlington Resources shareholders will own approximately 17%.
ConocoPhillips will fund its acquisition of Burlington Resources through existing cash on hand, existing credit facilities, and new additional bank and bond debt. The company plans to use cash from operations in the years ahead to reduce its outstanding debt.
The transaction, based on 2006 First Call estimates, is expected to be accretive to near-term production growth and cash flow per share, and slightly dilutive to ConocoPhillips near-term earnings per share. ConocoPhillips expects to achieve synergies and pre-tax cost savings of approximately $375 million annually after the operations of the two companies are fully integrated. These savings will result largely from reducing corporate expenses, optimizing the company’s exploration portfolio, and reducing operating expenses.
Standard & Poor’s Ratings Services has affirmed its ‘A-’corporate credit rating on ConocoPhillips following the acquisition announcement. The outlook is stable. At the same time, Standard & Poor’s gave its ‘BBB+’ corporate credit rating to Burlington and placed the company on CreditWatch with positive implications. When the transaction closes, the ratings on Burlington are expected to be equal with those of ConocoPhillips.
Pro forma for the acquisition, Houston-based ConocoPhillips will have about $29 billion of debt outstanding. The affirmation reflects the assessment that the proposed transaction, although at the outer range of expectations in terms of price and leverage, is consistent with the view of ConocoPhillips’s strategic objectives and financial policy. Historically, the company’s aggressive approach to growth and repeated spikes in leverage have retarded upward ratings momentum, even as the company’s business profile strengthened.
The acquisition of Burlington’s large, concentrated, and low-cost North American natural gas position and the considerable inventory of near-term production growth provide ConocoPhillips with much better production and growth visibility and an improved cost structure.
“This even stronger business profile offsets the near-term burden of considerable leverage undertaken in the acquisition, particularly in light of the likelihood of attractive oil and natural gas prices through 2006,” said Standard & Poor’s credit analyst John Thieroff.
These strong commodity prices should allow ConocoPhillips to generate significant free cash flow for debt reduction, he added.
Upon completion of the merger, Shackouls and Steven J. Shapiro, executive vice president, finance and corporate development, will retire, and Randy L. Limbacher, currently Burlington Resources’ executive vice president and COO, will become executive vice president responsible for North and South America, reporting to Mulva.
William B. Berry, presently ConocoPhillips’ executive vice president-exploration and production, will become executive vice president responsible for Europe, Asia, Africa, and the Middle East, also reporting to Mulva. Shackouls and William E. Wade, currently an independent director of Burlington Resources, will join ConocoPhillips’ board of directors.
A transition team has been formed and will be led by Limbacher of Burlington Resources, and John E. Lowe, ConocoPhillips’ executive vice president-planning, strategy, and corporate affairs.
The acquisition is conditioned upon, among other things, the approval of Burlington Resources shareholders and customary regulatory approvals. The transaction is expected to be completed in the first half of 2006.
Based on 2004 filings of US Securities and Exchange Commission Form 10-K, the post-transaction ConocoPhillips would be the second-largest producer of natural gas and the third-largest producer of crude oil and natural gas in the US.
Goldman Sachs & Co. and Citigroup Global Markets Inc. acted as financial advisors, and Wachtell, Lipton, Rosen & Katz acted as legal counsel to ConocoPhillips. Morgan Stanley and JP Morgan Securities Inc. acted as financial advisors, and Fried, Frank, Harris, Shriver & Jacobson LLP acted as legal counsel to Burlington Resources.
Headquartered in Houston, Burlington Resources conducts exploration, production, and development operations in the US, Canada, the United Kingdom, Africa, China, and South America.
ConocoPhillips is an integrated petroleum company with interests around the world. $
