Skepticism Greets Conoco-Burlington $35B Deal

Analysts pressed ConocoPhillips (COP) on Tuesday on why it would spend more than $30 billion to acquire natural gas producer Burlington Resources Inc. (BR) at a time when gas prices are hitting record highs but are expected to fall.

ConocoPhillips shares fell nearly 5 percent, their second day in a row of sharp declines, as a number of analysts at a company presentation on the merger questioned why it could not have made the deal earlier in the year, before natural gas roared past $15 per million British thermal units.

ConocoPhillips CEO Jim Mulva conceded that while gas prices would fall, they would still remain high enough to make the deal economically viable. The transaction would make ConocoPhillips North America's top producer of natural gas.

"We don't see necessarily a continuation of gas prices that we've seen here recently going out in the long-term," he said, adding that the company believes gas is headed to the $7-$8 range longer-term but that the deal could be economical even if prices fell to the $5 range.

Mulva also said that while the two sides have long talked about a deal, this happened to be the opportune time for them to actually merge.

ConocoPhillips investors said they were not necessarily surprised that the stock was selling off.

"Near-term you're seeing some discontent with ConocoPhillips because their stock is extremely undervalued as well and has a lower (price-to-earnings) ratio than Burlington," said Ben Halliburton, chief investment officer of Tradition Capital Management. "I'm not surprised Conoco is selling off on the news given their valuation and given what Burlington has done over the last year."

Through the end of last week, before word of the talks between the companies broke, Burlington shares were up 75 percent on the year.

Burlington shareholders will receive $46.50 cash plus 0.7214 Conoco shares for each of their shares. At those prices, and based on Burlington's September 30 share count, the deal was worth $33.41 billion as of Tuesday morning. Per Burlington share it was worth $88.38, a 2.9 percent premium.

Banc of America, in a research note Tuesday, said it was unlikely there would be another bidder for Burlington but also questioned the logic of the transaction.

"The apparent urgency of this bid is not as clear to us," analyst Dan Barcelo said in a note to clients, adding that ConocoPhillips already had a solid position in the natural gas market and that the deal added little in the way of refining and marketing strength.

Mulva said the company would be able to repay all of the debt incurred financing the Burlington acquisition within two to three years, even though it will actually trim earnings by 2 percent in 2006 and 4 percent in 2007.

Conoco shares were off $2.96, or 4.8 percent, at $58.19 on the New York Stock Exchange. Burlington shares were up $3.37, or 4.1 percent, at $85.87.

The deal is expected to close in the first half of 2006. It is the fifth-largest ever in the oil and gas sector, according to Dealogic, and the largest in five years, since Chevron (CVX) launched its $45.8 billion offer for Texaco. It also ranks as the fourth-largest deal of the year worldwide, Dealogic said.

"ConocoPhillips' purchase of Burlington confirms I think in the marketplace that reserves are extremely valuable, extremely scarce and easier to acquire in the stock market than they are with the drill bit," Tradition Capital's Halliburton said.